Who pays federal estate tax
The federal estate tax applies to the estate of a person who dies, before it passes to heirs. Since the One Big Beautiful Bill Act, the exemption is $15 million per person in 2026, indexed for inflation from 2027. Very few estates owe it, but those that do pay 40% on the amount above the exemption.
How the calculation works
- Start from the gross estate: real estate, investments, retirement accounts, business interests, life insurance you own and other assets at fair market value.
- Subtract debts, funeral and administration costs.
- Subtract amounts left to a U.S. citizen spouse (unlimited marital deduction) and to charity.
- Add taxable gifts made during life, beyond the annual exclusion of $19,000 per recipient.
- Tax = 40% × the amount above the exemption.
Worked example
| Item | Amount |
|---|---|
| Gross estate | $20,000,000 |
| Debts and expenses | $500,000 |
| Left to charity | $1,000,000 |
| Exemption | $15,000,000 |
- Taxable estate: 20,000,000 − 500,000 − 1,000,000 = $18,500,000.
- Amount above the exemption: $3,500,000.
- Federal estate tax: 40% × 3,500,000 = $1,400,000.
- Effective rate on the gross estate: 7%.
Portability for married couples
When the first spouse dies, the executor can file an estate tax return to transfer the unused exemption to the surviving spouse. Combined with the marital deduction, a couple can pass up to $30 million free of federal estate tax. The election requires filing Form 706 even if no tax is due.
State estate and inheritance taxes
About a dozen states and the District of Columbia have their own estate tax, some with exemptions of $1 to $2 million, and a few states have an inheritance tax paid by heirs, with rates that depend on the relationship. Residents of those states can owe state tax even far below the federal exemption.
Planning tools
Annual exclusion gifts, gifts to charity, irrevocable trusts and life insurance held in a trust are common ways to reduce a taxable estate. These strategies have legal and tax consequences, so they are best set up with an estate planning attorney.
Income tax for heirs
Heirs usually receive a stepped-up basis: assets take their value at death, so gains built up during the owner’s life escape capital gains tax. Retirement accounts are the exception and are taxed as the heirs withdraw.
This calculator gives estimates for education and planning. It is not investment, tax or legal advice; for decisions about your own situation, talk to a qualified financial professional.