What Is the Estate Tax Exemption and How Does It Work?

For deaths in 2026, the federal estate tax exemption is $15 million per person. Anything you leave above that amount is taxed on a graduated schedule that tops out at 40 percent; anything below it passes to your heirs free of federal estate tax. Married couples can effectively shield $30 million between them. Because the threshold is so high, fewer than one percent of deaths in the United States result in any federal estate tax at all, though state taxes can apply at much lower amounts.¹

The 2026 Amount and Why It’s Stable

The basic exclusion amount for someone who dies in 2026 is exactly $15,000,000.² That’s up from $13.99 million in 2025. The figure comes from the One, Big, Beautiful Bill Act, signed into law on July 4, 2025, which rewrote the exemption in a way that eliminated the sunset provision that had been hanging over estate planning since 2017.¹ Starting in 2027, the $15 million base will be adjusted annually for inflation.

Why the legislative change matters: from 2018 through 2025 the Tax Cuts and Jobs Act had temporarily doubled the exemption, and that increase was scheduled to expire at the end of 2025. Had it expired, the exemption would have dropped roughly in half. The new law made the higher amount permanent.

Mechanically, the exemption works as a credit against the tax rather than as a deduction from your estate. The IRS calculates the tax on the full estate using the rate schedule, then subtracts a credit equal to the tax that would apply to the first $15 million. If your estate is worth $16 million, you owe tax only on the $1 million above the exemption.

How the Tax on Amounts Above the Exemption Works

The federal estate tax uses a graduated rate schedule that starts at 18 percent and climbs through a series of brackets until it reaches 40 percent on amounts more than $1 million above the exemption.³ Because the credit wipes out the lower brackets, heirs of a taxable estate just above $15 million face an effective rate near 40 percent from the first dollar over. The 40 percent top rate has been in place since 2013.

The tax is levied on the estate itself before assets are distributed, not on individual beneficiaries. Your heirs don’t each get a tax bill. The executor pays the tax out of estate assets, and whatever remains is distributed under the will or state law.

Doubling the Exemption for Married Couples

Married couples effectively get a combined $30 million exemption through portability. When the first spouse dies, any unused portion of their $15 million exemption can transfer to the surviving spouse. The IRS calls this the deceased spousal unused exclusion, or DSUE.⁴

Here’s the catch that trips up families: the executor must file a federal estate tax return (Form 706) to claim the DSUE, even when the first spouse’s estate owes zero tax.⁴ Skipping the filing because no tax is due means the surviving spouse permanently loses the first spouse’s unused exemption. It’s one of the most expensive administrative oversights in estate planning.

If the executor missed the normal nine-month filing deadline, there is a safety net. Revenue Procedure 2022-32 allows a late portability election by filing Form 706 within five years of the decedent’s date of death, provided the estate wasn’t otherwise required to file.⁵ The executor must write “FILED PURSUANT TO REV. PROC. 2022-32 TO ELECT PORTABILITY UNDER § 2010(c)(5)(A)” at the top of the return, and no IRS user fee is required. After five years, the option disappears.

Lifetime Gifts Count Against the Same $15 Million

The $15 million is not just an estate tax exemption. It is a unified lifetime credit that covers both gifts made during life and whatever is left at death. Every dollar of exemption used on lifetime gifts reduces what’s available to shield the estate later.⁶

Separately, the annual gift tax exclusion lets you give up to $19,000 per recipient in 2026 without touching the lifetime exemption at all. A married couple can jointly give $38,000 per recipient. Gifts to a spouse who is not a U.S. citizen qualify for an increased annual exclusion of $194,000 in 2026.⁷

Give more than $19,000 to any one person in a year and you must file Form 709, the gift tax return, by April 15 of the following year.⁸ Filing doesn’t mean you owe gift tax. It reports that you’ve used a portion of your lifetime exemption. You won’t actually owe anything until your cumulative taxable gifts exceed $15 million.

For anyone worried about large gifts already made between 2018 and 2025 under the temporarily doubled exemption: the IRS finalized anti-clawback regulations in 2019 confirming those gifts won’t be penalized. The estate tax credit at death is computed using the greater of the exemption that applied when the gift was made or the exemption in effect at death.⁹

What Gets Counted in Your Estate

The gross estate includes the fair market value of everything you owned or had an interest in at the time of death.¹⁰ Real estate, bank accounts, investment accounts, retirement funds, business interests, vehicles, jewelry. Life insurance proceeds are included if you owned the policy or had any control over it at death.¹¹

Everything is valued at fair market value on the date of death, not at what you paid. A house bought for $200,000 that’s worth $900,000 when you die adds $900,000. Professional appraisals are typically needed for real estate, closely held businesses, and collectibles. The executor can elect an alternative valuation date six months after death if values have declined.

The gross estate is not the same as the taxable estate. Debts, mortgages, funeral expenses, administrative costs, bequests to a surviving spouse under the unlimited marital deduction, and charitable gifts are all subtracted before you get to the figure measured against your remaining exemption.

Step-Up in Basis for Heirs

When heirs receive property from an estate, the tax basis of that property resets to its fair market value at the date of death.¹² If a parent bought stock for $50,000 and it was worth $500,000 at death, the heir’s basis is $500,000. Sell the next day for $500,000 and there is zero capital gains tax. The step-up erases decades of unrealized appreciation and is one of the most valuable features of the system for families whose estates fall below the exemption.

The step-up does not apply to income in respect of a decedent, which includes inherited traditional IRA and 401(k) distributions. Those remain taxable as ordinary income when withdrawn.¹²

State Estate and Inheritance Taxes

The federal number isn’t the whole picture. About a dozen states plus the District of Columbia impose their own estate taxes, and most set their thresholds far below the federal level. A few start taxing estates above $1 million, meaning a family that owes nothing federally can still face a six-figure state tax bill. State estate tax rates generally range from roughly 1 percent to 16 percent.

Estate taxes and inheritance taxes are different. An estate tax is paid by the estate before assets are distributed. An inheritance tax is paid by the individual heir based on what they receive and their relationship to the deceased. Five states impose an inheritance tax, with rates from zero for close family up to 16 percent for unrelated beneficiaries. One state imposes both.

Most states with estate taxes do not offer portability, so married couples cannot transfer unused state exemptions the way they can federally. Planning in those states often uses credit shelter trusts to make sure both spouses’ state exemptions are actually used. Because state rules vary and change often, anyone with assets near or above $1 million should check current thresholds in their own state.

Generation-Skipping Transfers

If you leave assets to a grandchild or to an unrelated person more than 37.5 years younger, the generation-skipping transfer tax may apply on top of any estate or gift tax, at a flat 40 percent. The GST exemption mirrors the estate tax exemption at $15 million per person for 2026, and it’s allocated to specific trusts or transfers.¹³ Form 706 handles GST reporting alongside the estate tax return.¹⁴

Filing Form 706

The executor must file Form 706 within nine months of the date of death if the gross estate plus adjusted taxable gifts exceeds the filing threshold.¹⁵ Filing is also required to elect portability, regardless of the estate’s size.⁴

Form 4768 provides an automatic six-month extension of the filing deadline if the executor needs more time to gather appraisals and records.¹⁵ The extension applies to filing, not necessarily to payment, so interest may still accrue on unpaid tax.

Missing the deadline without an extension triggers a penalty of 5 percent of the unpaid tax for each month the return is late, capped at 25 percent, with a separate late-payment penalty on top.¹⁶ The IRS can waive both penalties for reasonable cause, but not knowing about the deadline rarely qualifies.

Non-Residents Face a $60,000 Threshold

The $15 million exemption is for U.S. citizens and residents. Individuals who are neither pay estate tax on U.S.-situated assets under a much lower filing threshold. The executor must file Form 706-NA if the decedent’s U.S. assets, combined with certain prior gifts, exceed just $60,000.¹⁷ U.S.-situated assets include domestic real estate, tangible personal property located in the United States, and stock in U.S. corporations. Tax treaties may raise the effective exemption or provide credits, but absent a treaty the threshold remains $60,000.

1
Internal Revenue Service. What’s New — Estate and Gift Tax
2
Office of the Law Revision Counsel. 26 USC 2010 – Unified Credit Against Estate Tax
3
Office of the Law Revision Counsel. 26 US Code 2001 – Imposition and Rate of Tax
4
Internal Revenue Service. Instructions for Form 706 (09/2025) – Section: Part VI Portability of Deceased Spousal Unused Exclusion (DSUE)
5
Internal Revenue Service. Revenue Procedure 2022-32
6
eCFR. 26 CFR 20.2010-1 – Unified Credit Against Estate Tax; In General
7
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026, Including Amendments from the One, Big, Beautiful Bill
8
Internal Revenue Service. 2025 Instructions for Form 709 – United States Gift (and Generation-Skipping Transfer) Tax Return
9
Internal Revenue Service. Estate and Gift Tax FAQs
10
Office of the Law Revision Counsel. 26 USC 2031 – Definition of Gross Estate
11
eCFR. 26 CFR 20.2031-1 – Definition of Gross Estate; Valuation of Property
12
Office of the Law Revision Counsel. 26 US Code 1014 – Basis of Property Acquired from a Decedent
13
Office of the Law Revision Counsel. 26 USC 2631 – GST Exemption
14
Internal Revenue Service. About Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return
15
Internal Revenue Service. Instructions for Form 706 (Rev. September 2025) – Section: When To File
16
Office of the Law Revision Counsel. 26 US Code 6651 – Failure to File Tax Return or to Pay Tax
17
Internal Revenue Service. Transfer Certificate Filing Requirements for the Estates of Nonresidents Not Citizens of the United States