Yes, there is a federal estate tax, but it only applies to estates worth more than $15 million in 2026, so fewer than 1 percent of estates owe anything to the IRS.1Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 About a dozen states and the District of Columbia impose their own estate taxes with much lower thresholds, and five states charge a separate inheritance tax on the people who receive the assets. Whether anyone actually pays comes down to the size of the estate and the state where the deceased lived or owned property.
The Federal Exemption and Rate in 2026
For deaths in 2026, the first $15 million of an estate passes federally tax-free.2Office of the Law Revision Counsel. 26 USC 2010 – Unified Credit Against Estate Tax That figure rose from $13.99 million in 2025 after the One, Big, Beautiful Bill Act was signed on July 4, 2025. The new law made the higher exemption permanent and set it to rise each year with inflation starting in 2027. Before this change, the exemption was scheduled to drop back to roughly $7 million at the end of 2025. That sunset no longer applies.
When an estate exceeds the exemption, only the amount above $15 million is taxed. The rate schedule is graduated, starting at 18 percent on the first $10,000 of taxable value, but the brackets are narrow.3Office of the Law Revision Counsel. 26 USC 2001 – Imposition and Rate of Tax The top rate of 40 percent kicks in quickly, so almost every taxable estate ends up paying at or near 40 percent on most of the excess. An estate worth $17 million in 2026 has $2 million in taxable value, nearly all of it in the top bracket.
Doubling the Exemption for Married Couples
A married couple can shield up to $30 million from federal estate tax through a mechanism called portability. When the first spouse dies, any unused portion of that spouse’s $15 million exemption transfers to the survivor.2Office of the Law Revision Counsel. 26 USC 2010 – Unified Credit Against Estate Tax
Portability is not automatic. The executor of the first spouse’s estate has to file Form 706 to make the election, even if the estate owes no tax and would not otherwise need to file. The return is generally due nine months after death, with a six-month extension available. A late portability election can still be made within five years of the first spouse’s death under a special IRS procedure.4Internal Revenue Service. Instructions for Form 706
Estate Tax vs. Inheritance Tax
These two taxes are often confused, and the difference matters. An estate tax is paid by the deceased person’s estate before assets are distributed. An inheritance tax is paid by each individual beneficiary who receives assets, and the rate typically depends on how closely related that beneficiary was to the deceased.
The federal government imposes only an estate tax. There is no federal inheritance tax. At the state level, some states impose one, some the other, and Maryland imposes both.
State Estate and Inheritance Taxes
For most families, if any death tax is owed, it will come from the state, not the IRS. Roughly a dozen states and the District of Columbia impose their own estate taxes with exemptions far below the federal level. Oregon starts taxing at $1 million and Massachusetts at $2 million, so estates that owe nothing federally may still face a state bill. Illinois uses a $4 million threshold, New York uses roughly $7.35 million, and Connecticut matches the federal exemption at $15 million.
Most states cap their top rate at 16 percent. Washington and Hawaii both reach 20 percent at the top, and Washington’s schedule can climb higher for certain brackets. Connecticut uses a flat rate rather than a graduated one. A few states also use a “cliff” structure: once the estate exceeds the exemption by a certain percentage, the entire estate value is taxed instead of just the excess. That can turn a small overage into a large bill.
Five states charge an inheritance tax: Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. Rates run from 0 percent for exempt beneficiaries up to about 16 percent for the most distant or unrelated recipients. Spouses are typically exempt entirely, and children or close relatives usually pay lower rates. Some of these states tax from the first dollar; others allow modest exemptions for certain beneficiary classes. In Maryland, both taxes can apply to the same estate.
If the deceased owned real estate in more than one state, each state’s rules can apply to the property located there. Checking every state where property was owned matters as much as checking the state of residence.
What Counts as Part of the Estate
The federal gross estate includes the fair market value of everything the person owned or had an interest in at death.5Office of the Law Revision Counsel. 26 USC 2031 – Definition of Gross Estate Fair market value means what a willing buyer and willing seller would agree to, with neither under pressure.6eCFR. 26 CFR 20.2031-1 – Definition of Gross Estate; Valuation of Property Included in the total:
- Real estate and bank accounts, wherever located
- Stocks, bonds, mutual funds, and retirement accounts
- Ownership stakes in partnerships, LLCs, or corporations
- Life insurance proceeds, if the deceased owned or controlled the policy
- Vehicles, jewelry, art, and collectibles
- Certain lifetime transfers, including assets given away within three years of death or over which the deceased kept control
- Royalties, patents, and pending legal claims
Deductions That Can Wipe Out the Tax
Before the exemption is applied, the estate can subtract several deductions, and these often reduce the taxable amount to zero.
Anything left to a surviving spouse who is a U.S. citizen is fully deductible, with no dollar limit.7Office of the Law Revision Counsel. 26 USC 2056 – Bequests to Surviving Spouse The tax on those assets is deferred until the surviving spouse dies. Anything left to qualifying charitable, religious, educational, or government organizations is also fully deductible, with no cap.8Office of the Law Revision Counsel. 26 USC 2055 – Transfers for Public, Charitable, and Religious Uses
The estate can also deduct funeral expenses, legal and accounting fees for administering the estate, the deceased’s outstanding debts, and unpaid mortgages on property included in the gross estate.9Office of the Law Revision Counsel. 26 USC 2053 – Expenses, Indebtedness, and Taxes Any state estate, inheritance, or succession taxes actually paid come off the federal taxable estate as well.10Office of the Law Revision Counsel. 26 USC 2058 – State Death Taxes
What Heirs Actually Care About: Step-Up in Basis
For most people, the practical tax question about an inheritance is not the estate tax but the capital gains treatment of what they receive. When you inherit property, your cost basis is generally reset to the fair market value on the date the previous owner died.11Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired from a Decedent If a parent bought stock for $50,000 and it was worth $300,000 at death, your basis is $300,000. Selling for $310,000 produces a $10,000 gain, not $260,000.
When an estate tax return has been filed, your reported basis cannot exceed the value used on that return.11Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired from a Decedent If you later sell inherited property for more than your stepped-up basis, you report the gain on Schedule D of your income tax return.12Internal Revenue Service. Gifts and Inheritances The inheritance itself is not taxable income to you.
The Gift Tax Runs on the Same Meter
The federal gift tax and the estate tax share one lifetime exemption. Any part of the $15 million you use during life on taxable gifts reduces what’s left to shelter your estate at death.13Internal Revenue Service. Whats New – Estate and Gift Tax Give away $3 million in taxable gifts and you have $12 million left at death.
The annual gift tax exclusion sits outside that meter. In 2026, you can give up to $19,000 per recipient per year without touching the lifetime exemption at all. A married couple can together give $38,000 per recipient. Gifts to a U.S.-citizen spouse are entirely unlimited; gifts to a non-citizen spouse are excluded up to $194,000 in 2026.1Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
Filing Form 706 and the Deadlines
Estates that exceed the filing threshold report their assets, deductions, and tax on IRS Form 706, due within nine months of death.14Internal Revenue Service. Instructions for Form 706 Filing Form 4768 before that deadline grants an automatic six-month extension to file. Estates below the threshold that want to elect portability for the surviving spouse also have to file Form 706.4Internal Revenue Service. Instructions for Form 706
After the IRS reviews the return, the executor can request an estate tax closing letter through Pay.gov for a $56 fee.15Internal Revenue Service. Frequently Asked Questions on the Estate Tax Closing Letter The letter confirms the return has been accepted, which gives the executor cover to distribute the remaining assets.
Missing the filing deadline triggers a failure-to-file penalty of 5 percent of the unpaid tax per month, capped at 25 percent.16Internal Revenue Service. Failure to File Penalty A separate failure-to-pay penalty of 0.5 percent per month runs on any unpaid balance, and interest compounds on both. The six-month extension covers the filing deadline only. Payment is still due nine months after death, and interest starts running the day after.