A taxable estate is the portion of what someone owned at death that federal tax actually applies to, after subtracting debts, funeral and administration costs, and specific deductions like property left to a spouse or to charity. For anyone dying in 2026, only value above $15 million per person is taxed at all.1Office of the Law Revision Counsel. 26 USC 2010 – Unified Credit Against Estate Tax Working out the number is a sequence: total up everything the person owned, take off what the law allows, add back certain lifetime gifts, and compare the result to the exemption.
Step One: Add Up the Gross Estate
The gross estate is the starting figure. It covers the fair market value of everything the decedent owned or had an interest in at death, whether tangible or intangible, and wherever it sits.2Office of the Law Revision Counsel. 26 USC 2031 – Definition of Gross Estate Real estate, bank accounts, investment portfolios, vehicles, business interests, and personal property all count.
The gross estate is often much larger than what goes through probate, because it also picks up assets that transfer automatically. Revocable trusts, jointly held property, and retirement accounts with named beneficiaries land here even though none of them touches a will. Life insurance is the classic surprise: if the decedent held any “incidents of ownership” in a policy at death, the full death benefit gets pulled in.3Office of the Law Revision Counsel. 26 USC 2042 – Proceeds of Life Insurance Incidents of ownership go beyond simply owning the policy — the term also covers the power to change a beneficiary, cancel or surrender it, assign it, or borrow against its cash value.4eCFR. 26 CFR 20.2042-1 – Proceeds of Life Insurance
How Assets Are Valued
Assets are generally valued at their fair market value on the date of death. The executor can instead elect an alternate valuation date, which values most assets six months after death.5Office of the Law Revision Counsel. 26 USC 2032 – Alternate Valuation That election is only available if it reduces both the gross estate and the total estate tax, and it’s all-or-nothing. The executor can’t cherry-pick which assets get the later date. For anything sold or distributed inside those six months, the value locks in on the date it left the estate.
Executors document values using bank statements, brokerage records, and professional appraisals. Any single item or collection worth more than $3,000 needs a sworn appraisal from a qualified expert, attached to Form 706 when the return is filed.6Internal Revenue Service. Instructions for Form 706 (Rev. September 2025)
Step Two: Subtract Debts and Expenses
Once the gross estate is set, deductions bring it down. Reasonable funeral costs — burial services, a cemetery plot, transportation, and related expenses — come off first, as long as the estate actually pays them.7Office of the Law Revision Counsel. 26 USC 2053 – Expenses, Indebtedness, and Taxes
Administration expenses come off next. Attorney fees, accountant fees, appraisal costs, and executor compensation are all deductible when they’re necessary to settle the estate. So are the decedent’s outstanding debts at death: mortgages, credit card balances, medical bills, and any other legitimate claims.7Office of the Law Revision Counsel. 26 USC 2053 – Expenses, Indebtedness, and Taxes Keep invoices and receipts. The IRS can request documentation during an audit.
Transfers to a Spouse
Property passing to a surviving spouse who is a U.S. citizen is fully deductible from the gross estate with no dollar limit.8Office of the Law Revision Counsel. 26 USC 2056 – Bequests, Etc., to Surviving Spouse An estate of $50 million could pass entirely to a surviving citizen-spouse and owe zero federal estate tax. The tax isn’t forgiven, only deferred. When the surviving spouse later dies, whatever is left faces the calculation fresh.
When the surviving spouse is not a U.S. citizen, the unlimited marital deduction doesn’t apply.8Office of the Law Revision Counsel. 26 USC 2056 – Bequests, Etc., to Surviving Spouse The deduction can still be preserved through a Qualified Domestic Trust (QDOT), which must have at least one trustee who is a U.S. citizen or a domestic corporation with the right to withhold estate tax on any distribution of principal.9Office of the Law Revision Counsel. 26 USC 2056A – Qualified Domestic Trust The executor elects QDOT treatment on the estate tax return, and the election is irrevocable.
Transfers to Charity
Bequests to qualifying charitable, religious, educational, or government organizations are fully deductible with no cap.10Office of the Law Revision Counsel. 26 USC 2055 – Transfers for Public, Charitable, and Religious Uses An entire estate could be left to charity and reduce the taxable estate to zero. The receiving organization must hold valid tax-exempt status, and the executor should confirm that status before claiming the deduction.
Step Three: Add Back Lifetime Gifts
The estate tax and gift tax share a single unified exemption. Every dollar of that exemption used during life is a dollar unavailable at death. Someone who made $5 million of taxable gifts while alive has $5 million less exemption to work with when they die.11Internal Revenue Service. What’s New – Estate and Gift Tax On Form 706, the executor reports these prior gifts as “adjusted taxable gifts,” and the calculation adds them back in to determine the correct bracket and credit.
Small gifts don’t count against the exemption. For 2026, the annual gift tax exclusion is $19,000 per recipient.11Internal Revenue Service. What’s New – Estate and Gift Tax Gifts within that limit don’t require a gift tax return and don’t touch the lifetime exemption. Married couples can combine their exclusions, allowing up to $38,000 per recipient per year. Direct payments for someone’s tuition or medical expenses, made straight to the institution, are also excluded entirely.
Step Four: Compare to the $15 Million Exemption
For anyone dying in 2026, the basic exclusion amount is $15 million.1Office of the Law Revision Counsel. 26 USC 2010 – Unified Credit Against Estate Tax A married couple using both exemptions can shield up to $30 million. If the taxable estate falls below the exemption, the tax is zero, and in most cases no Form 706 filing is required.
The $15 million figure comes from the One Big Beautiful Bill Act, signed into law on July 4, 2025, which permanently raised the exemption from its prior level under the Tax Cuts and Jobs Act.11Internal Revenue Service. What’s New – Estate and Gift Tax The new exemption does not sunset. Beginning in 2027, the $15 million base will adjust upward for inflation.
The Effective 40 Percent Rate
On paper, the estate tax rate schedule is graduated, starting at 18 percent on the first $10,000 and climbing through a dozen brackets to a top rate of 40 percent on amounts over $1 million.12Office of the Law Revision Counsel. 26 USC 2001 – Imposition and Rate of Tax In practice, every dollar above $15 million is taxed at 40 percent, because the exemption itself is far larger than the $1 million threshold where the top bracket begins. The lower brackets get absorbed by the unified credit. For planning purposes, treat the estate tax as a flat 40 percent on anything over the exemption.
Portability Between Spouses
If the first spouse dies without using their full exemption, the leftover amount can pass to the survivor. This is the deceased spousal unused exclusion, or DSUE. The surviving spouse’s total exemption then becomes their own $15 million plus whatever the first spouse didn’t use.1Office of the Law Revision Counsel. 26 USC 2010 – Unified Credit Against Estate Tax
Portability isn’t automatic. The executor of the first spouse’s estate must file Form 706 and affirmatively elect it, even if the estate is well under the filing threshold. For estates below the threshold, the election can be made up to five years after the date of death under a simplified procedure.13Internal Revenue Service. Revenue Procedure 2022-32 Miss that deadline and the unused exemption is gone permanently. It’s one of the most expensive estate planning mistakes there is: the surviving spouse’s family can forfeit millions in sheltered wealth because nobody filed the paperwork.
Filing Deadline and Late Penalties
Form 706 is due nine months after the date of death.14Office of the Law Revision Counsel. 26 USC 6075 – Time for Filing Estate and Gift Tax Returns The IRS can grant a six-month extension for filing, but an extension of time to file is not an extension of time to pay. The estate should estimate and pay its tax liability by the original nine-month deadline to avoid interest.
Late-filing penalties add up fast. An estate that misses the deadline without reasonable cause faces a penalty of 5 percent of the unpaid tax for each month the return is late, capping at 25 percent.15Office of the Law Revision Counsel. 26 USC 6651 – Failure to File Tax Return or to Pay Tax A separate failure-to-pay penalty runs at 0.5 percent per month, also capping at 25 percent. Both penalties accrue simultaneously alongside interest, so an estate that ignores its obligations for a year can see the total bill climb well beyond the original tax owed.
State Taxes Can Still Apply
Federal estate tax is only part of the picture. About a dozen states and the District of Columbia impose their own estate taxes, often with exemption thresholds far below the federal $15 million. Some state exemptions start as low as $1 million, meaning an estate that owes nothing to the IRS could still face a substantial state tax bill. A handful of states impose an inheritance tax instead, where the rate depends on the beneficiary’s relationship to the decedent. Spouses and children typically pay little or nothing, while distant relatives and unrelated heirs face rates up to 16 percent. Rules vary by state, one state imposes both, and families with property in multiple states should check each state’s requirements.