What Are Estate Taxes?

How Does Estate Tax Work?

Estate tax is levied on the assets a person leaves behind when they die. When someone passes away, the person administering their estate usually takes stock of their assets, pays off debts and calculates the estate's taxable value to see whether estate taxes are due to the federal or state government.

Federal estate taxes are only required when the estate's taxable value exceeds the estate tax filing threshold. The filing threshold is $15 million 2026, but this amount is adjusted annually for inflation. Any taxable estate valued at $15 million or less is exempt from federal estate tax, which means there is no requirement to file taxes or pay.

Filing an estate tax return (Form 706) is separate from filing a final income tax return (Form 1040) for the deceased person. This is routine, unless the deceased person's income was too low to require filing a return. It's also separate from filing an estate income tax return (Form 1041). Final income taxes and estate taxes are paid by the estate before assets are distributed.

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What Counts as a Taxable Estate?

The taxable portion of an estate is the combined fair market value of the estate's assets, minus deductions and plus taxable gifts. Here's how that breaks down:

• The gross estate adds up the fair market value of cash and securities, real estate, life insurance, trusts, annuities, business interests and other assets.
• Deductions include mortgages and other debts, estate administration expenses and property that passes to surviving spouses and qualified charities. In some cases, adjustments may apply to qualifying business interests or farms.
• Taxable gifts include the transfer of money or other assets that exceeds the IRS' annual or lifetime limits on nontaxable gifts. For 2025 and 2026, the annual limit is $19,000 per individual recipient with a lifetime cap of $13.99 million in 2025 and $15 million in 2026.

Reminder: Ownership and beneficiary designations matter. When estate planning, make sure joint owners and beneficiaries on accounts like your 401(k) are up to date (and not an ex-spouse or deceased relative, for example).

Estate Tax vs. Gift Tax

Estate taxes apply to assets transferred after your death; gift taxes apply to assets transferred while you're alive. Gift taxes and estate taxes are separate but related. In simple terms, the IRS requires you to report gifts of cash or assets on Form 709 if they exceed $19,000 per person in a given year. This annual exemption is adjusted yearly for inflation.

Reportable gifts become part of your $15 million lifetime exemption for gift and estate taxes. If you exceed the $15 million limit while you're still alive, reportable gifts will be subject to gift tax. If not, gifts are simply reported and become part of your estate's taxable value when you pass.

Here's a quick comparison of estate versus gift taxes:

Tip: In addition to gifts valued at less than the annual gift exclusion ($19,000), you may also exclude tuition or medical expenses you pay for someone else, gifts to your spouse and gifts to political organizations. You may deduct gifts to qualifying charities.

How Much Is Federal Estate Tax?

Federal estate tax rates range from 18% to 40% on estate values that exceed the federal exemption. Estate taxes are calculated progressively, the same way income taxes are applied based on marginal tax rates and tax brackets.

Here are the federal estate tax rates by taxable amounts:

Source: IRS

Example: If your taxable estate is valued at $15,150,000, your first $15 million is exempt. The remaining $150,000 is taxed at the following rates:

• $10,000 x 18% = $1,800
• $10,000 x 20% = $2,000
• $20,000 x 22% = $4,400
• $20,000 x 24% = $4,800
• $20,000 x 26% = $5,200
• $20,000 x 28% = $5,600
• $50,000 x 30% = $15,000
• Total = $38,800

What States Have Estate Tax?

In addition to federal rules, 12 U.S. states and Washington, D.C., have their own estate taxes. Except for Connecticut, which matches the federal exemption, each state has its own threshold for filing and its own estate tax rates. Here are the states that impose estate taxes, along with their tax rates and 2025 exemption thresholds.

What's the Difference Between an Estate Tax and an Inheritance Tax?

Inheritance taxes are charged to heirs instead of the estate itself. State inheritance taxes apply in the state where the deceased person lived. If you live in New York and inherit money from a person who lived in Kentucky, for instance, you'll pay an inheritance tax to the state of Kentucky.

Inheritance tax rules can be complicated: Different rates and exemptions may apply based on an heir's relationship to the deceased person. In Kentucky, spouses, parents, children, grandchildren and siblings are exempt. Nieces, nephews, daughters-in-law, sons-in-law, aunts, uncles and great-grandchildren pay one set of tax rates, while all other heirs pay slightly higher rates.

Learn more: Things to Know About Estate Planning

What States Have an Inheritance Tax?

Five states have inheritance taxes, with rates ranging from 0% to 16%.

When Are Estate Taxes Due?

Federal estate tax returns are due nine months after the date of death. You can request an automatic six-month extension as long as you do so prior to the due date and pay the estimated amount of tax by the original date the return is due.

Check with the appropriate state's taxing authority for more information on when state estate tax returns and inheritance taxes are due.

How to Reduce Estate Taxes

The simplest way to reduce estate taxes is by keeping your estate value below the exemption threshold of $15 million—far more than most Americans have at the time of their death in any case.

If you anticipate having a large estate, you may want to consult an attorney or financial professional with experience in estate planning. They can help you structure an inheritance plan and manage your estate's taxable value through the strategic use of trusts, life insurance and business succession planning.

Meanwhile, you can also reduce the size of your estate in four tried-and-true ways:

1. Gift It

In 2026, there is no tax consequence for gifting money or assets worth up to $19,000 annually per recipient. If you're married, you and your spouse can each gift $19,000. This annual exemption adjusts yearly for inflation, so you may be able to give even more in future years. Gifting assets in increments while you're alive allows you to transfer more of your wealth tax-free.

2. Donate It

Give money or assets to charity to minimize the size of your estate. Donations to a qualified charity are tax deductible while you're living and deductible from your estate when you've passed. An estate planning pro can help you maximize tax benefits and comply with IRS and state guidelines for giving.

3. Pay for Tuition or Medical Expenses

Direct payments you make to cover medical or educational expenses are deductible from your taxable estate.

4. Spend It

While it's never wise to overspend, saving money on estate taxes could be a reason to loosen your purse strings if your estate is likely to surpass $15 million. Travel to visit friends or host a family reunion if you'd rather enjoy your money than give it to the government when you're gone.

Frequently Asked Questions

The Bottom Line

Most estates don't exceed the $15 million IRS exemption for federal estate taxes. And, though estate and inheritance taxes may apply at the state level, most states don't impose them. If you're leaving behind (or administering) an estate, or you're receiving an inheritance in a state that imposes inheritance tax, make sure to read up on IRS and state guidelines.

When in doubt, consider getting help from a knowledgeable estate planning attorney, financial advisor or tax professional. They can help you avoid overpaying while complying with state and federal law.