Probate taxes and the tax treatment of estates cover four distinct obligations that can hit after a death: the federal estate tax on the value of what the person owned, state estate or inheritance taxes with much lower thresholds, income tax on money the estate itself earns before distribution, and a final personal income tax return for the deceased. Probate court filing fees sit alongside those taxes as a separate cost of using the court system. Most estates owe nothing federally, but state taxes, compressed income tax brackets on estate earnings, and missed filings can still produce real bills for families well below the federal line.
Federal Estate Tax and Who Actually Owes It
The federal estate tax applies to the transfer of a deceased person’s wealth, and it reaches only the largest estates. The tax is calculated on the gross estate, which includes almost everything the person owned or had a financial interest in at death: real estate, bank accounts, investments, retirement accounts, and life insurance proceeds, including assets that skip probate.
For deaths in 2026, the basic exclusion amount is $15,000,000 per person. Estates below that owe no federal estate tax. Congress set this figure as a new permanent base in 2025 to replace the expiring Tax Cuts and Jobs Act provisions, and inflation adjustments will raise it in later years.1Office of the Law Revision Counsel. 26 U.S. Code 2010 – Unified Credit Against Estate Tax Above the threshold, rates are progressive, starting at 18 percent and topping out at 40 percent on amounts more than $1,000,000 over the exemption.2Office of the Law Revision Counsel. 26 U.S. Code 2001 – Imposition and Rate of Tax
When the gross estate exceeds the exclusion, the executor files Form 706, the United States Estate Tax Return, within nine months of the date of death.3Internal Revenue Service. Instructions for Form 706 An automatic six-month extension is available, but it extends only the filing deadline, not the time to pay. The return requires detailed appraisals of every asset, and the IRS scrutinizes valuations. Once the tax is paid and accepted, the IRS issues a closing letter that clears the way for final distribution.
Deductions That Bring the Taxable Estate Down
Two deductions cut the estate tax bill dramatically for most families.
The marital deduction lets the estate deduct the full value of any property passing to a surviving spouse who is a U.S. citizen. There is no cap. A person can leave $50 million to a citizen spouse and owe zero federal estate tax on that transfer.4Office of the Law Revision Counsel. 26 U.S. Code 2056 – Bequests, Etc., to Surviving Spouse The tax is deferred rather than eliminated: when the surviving spouse dies, those assets fall into their estate. Transfers to a non-citizen spouse do not qualify for the unlimited deduction unless they run through a qualified domestic trust.
The charitable deduction is similar. Bequests to qualifying charities, religious organizations, educational institutions, and government entities are fully deductible from the gross estate, with no percentage-of-income cap.5Office of the Law Revision Counsel. 26 U.S. Code 2055 – Transfers for Public, Charitable, and Religious Uses Every dollar going to a qualifying organization reduces the taxable estate by a dollar.
Portability: Why You May Need to File Even When No Tax Is Due
When the first spouse in a married couple dies with an estate below the $15,000,000 exemption, the unused portion can transfer to the surviving spouse. This is the Deceased Spousal Unused Exclusion, or DSUE. In principle, a married couple can shelter up to $30,000,000 from federal estate tax, but only if the executor files Form 706 for the first spouse’s estate, even when no tax is owed.
That is where estates routinely leave money on the table. If the first spouse dies with a $4 million estate, there is no tax obligation and no obvious reason to file. Skipping the return forfeits roughly $11 million in unused exemption the surviving spouse could have used later. Executors who miss the standard nine-month deadline can still file solely to elect portability up to five years after the date of death under Rev. Proc. 2022-32.6Internal Revenue Service. Instructions for Form 706 After that window closes, relief becomes much harder to obtain.
Step-Up in Basis for Inherited Property
Heirs get one of the most valuable benefits in the tax code: a step-up in basis on inherited assets. Your cost basis for capital gains purposes resets to the fair market value on the date the owner died, not what they originally paid.7Office of the Law Revision Counsel. 26 U.S. Code 1014 – Basis of Property Acquired From a Decedent
Suppose a parent bought a home for $100,000 decades ago and it is worth $500,000 when they die. If they had sold it the day before death, they would have owed capital gains tax on $400,000 of profit. The heir who inherits it starts with a $500,000 basis. If they sell the next week for $500,000, the taxable gain is zero. Any sale price above the stepped-up basis produces a taxable gain; a sale at or below it does not.8Internal Revenue Service. Gifts and Inheritances
The step-up applies to real estate, stocks, mutual funds, and most other appreciated assets in the estate. In community property states it also applies to the surviving spouse’s half of community property. One limitation matters: the basis an heir reports on a sale must be consistent with the value reported on the estate tax return, if one was filed. Claiming a higher basis than the estate tax value can trigger an accuracy-related penalty.8Internal Revenue Service. Gifts and Inheritances
State Estate and Inheritance Taxes
The federal number is only half the picture. About 18 jurisdictions impose their own estate or inheritance tax, and the thresholds are far lower than the federal $15,000,000 exemption. Several states begin taxing estates worth $1,000,000 to $2,000,000, with rates that run from roughly 1 percent to 16 percent depending on the state and the estate size. An estate that owes nothing to the IRS can still face a six-figure state tax bill.
States use one of two models. An estate tax works like the federal version: the total value of what the deceased left behind is taxed, and the estate pays before distribution. An inheritance tax taxes the person receiving the assets, with the rate usually tied to the heir’s relationship to the deceased. Surviving spouses and children often pay nothing or very little; more distant relatives and unrelated beneficiaries can face rates as high as 15 to 18 percent. A handful of states impose both, and the majority impose neither.
The state where the deceased lived generally controls which rules apply. Real estate located in another state can trigger a filing obligation there as well. State deadlines often differ from the federal nine-month window, so executors need to check local requirements immediately. These rules change frequently, and general knowledge is a poor substitute for the current state statute.
Income Tax on What the Estate Earns After Death
From the moment someone dies until the estate is fully distributed, the estate itself is a separate taxpayer. Interest, dividends, rent, and business profits generated during that period belong to the estate and must be reported on its own return.9Office of the Law Revision Counsel. 26 U.S. Code 641 – Imposition of Tax
The executor needs to obtain an Employer Identification Number (EIN) from the IRS to open estate bank accounts and file returns. If the estate earns more than $600 in gross income during a tax year, the executor must file Form 1041.10Internal Revenue Service. Instructions for Form 1041 and Schedules A, B, G, J, and K-1 This income tax is separate from the estate tax; it applies to money earned after death, not to the value of what the deceased already owned.
Income tax brackets for estates are brutally compressed compared to individual rates. An individual does not reach the top 37 percent federal bracket until income exceeds several hundred thousand dollars. An estate hits that same 37 percent rate at around $16,250 in taxable income for 2026. Even modest earnings from a rental property or investment portfolio can be taxed at the highest rate if they stay inside the estate. Executors can soften the blow by distributing income to beneficiaries during the year: distributions are generally deductible by the estate and reported as income by the beneficiary on their personal return, where individual brackets are far more favorable.
Income in Respect of a Decedent
Certain income items straddle the line between the deceased’s final return and the estate’s return. Income in respect of a decedent, or IRD, covers amounts the person had earned or was entitled to but had not yet received. Common examples include unpaid wages, accrued interest, and, most importantly, traditional IRA and 401(k) distributions.11eCFR. 26 CFR 1.691(a)-1 – Income in Respect of a Decedent
IRD does not get the step-up in basis. When a beneficiary inherits a traditional IRA and takes distributions, those withdrawals are taxed as ordinary income, just as they would have been for the original account holder. For large retirement accounts, this can produce a significant and unexpected tax bill. If the IRD assets were large enough to increase the federal estate tax, the beneficiary can claim an income tax deduction for the portion of estate tax attributable to those IRD items. The calculation is not simple, but for estates that actually paid federal estate tax, this deduction can meaningfully reduce the income tax hit.
The Decedent’s Final Personal Return
Every deceased person still needs a final Form 1040 covering income from January 1 of the year of death through the date they died. This return reports wages, pension payments, Social Security benefits, and any other personal income received while the person was alive. The executor prepares and files it by the normal April deadline.12Office of the Law Revision Counsel. 26 U.S. Code 6012 – Persons Required to Make Returns of Income
If the deceased was married, the surviving spouse can file a joint return for that final year. Joint filing usually produces a lower tax bill through more favorable brackets and a higher standard deduction. The surviving spouse signs on behalf of the deceased, and any refund owed becomes an asset of the estate.
One planning point is easy to miss. If the estate pays the deceased person’s medical bills within one year after death, the executor can elect to deduct those expenses on the decedent’s final income tax return instead of on the estate tax return. The deduction is subject to the standard 7.5 percent of adjusted gross income floor, but for decedents with substantial final medical costs, the election can produce real savings.13Internal Revenue Service. Publication 559, Survivors, Executors, and Administrators The executor must attach a statement waiving the right to claim the same expenses on Form 706; the IRS will not allow the deduction in both places.
Probate Court Filing Fees
Separate from any tax, the probate court charges fees for validating the will and supervising the transfer of assets. These are administrative costs for using the court system, not taxes in the strict sense, though people sometimes call them “probate taxes” in casual conversation.
Most jurisdictions calculate the fee on the gross value of assets passing through probate, often a set dollar amount per thousand dollars of estate value. Actual costs vary widely: a modest estate might pay a few hundred dollars, and a larger one could owe over a thousand. Fees are typically based on gross value before debts, so an estate carrying a large mortgage still pays fees on the full property value.
Assets that bypass probate entirely, such as jointly held property, accounts with named beneficiaries, and assets in a living trust, are generally excluded from the fee calculation. That is one of the practical reasons estate planners recommend beneficiary designations and trust structures. The federal estate tax still captures those assets, but court fees and delays drop.
Deadlines and Penalties the Executor Needs to Track
Executors juggle overlapping deadlines, and missed ones produce penalties that come out of estate assets:
- Form 706, the estate tax return, is due nine months after death, with an automatic six-month filing extension available. Tax owed must still be paid by the nine-month mark regardless of the filing extension.3Internal Revenue Service. Instructions for Form 706
- Form 1041, the estate income tax return, is due on the 15th day of the fourth month after the estate’s tax year ends. Estates using a fiscal year have different due dates than those on a calendar year.
- The final Form 1040 for the deceased is due on the normal April filing deadline for the year of death.
Late filing carries a penalty of 5 percent of the unpaid tax for each month the return is overdue, capped at 25 percent. Late payment adds 0.5 percent per month, also capped at 25 percent. Both run at the same time, and when they overlap the filing penalty is reduced by the payment penalty, but the combined hit still accumulates fast.14Office of the Law Revision Counsel. 26 U.S. Code 6651 – Failure to File Tax Return or to Pay Tax A 20 percent accuracy-related penalty applies on top if the IRS determines the estate undervalued its assets through negligence or a substantial valuation misstatement.6Internal Revenue Service. Instructions for Form 706
Executors who see early that they cannot meet a deadline should file for extensions and pay estimated amounts promptly. The IRS is more willing to waive penalties when the executor acted in good faith and paid what they could on time, even when the paperwork arrived late.