Estate tax is a federal tax on the total value of what you leave behind, and the rate depends on how much your estate is worth

The federal estate tax rate is a flat 40 percent on the portion of your estate that exceeds the exemption threshold. That threshold changes each year — for 2024, it is $13.61 million per person. This means if your estate is worth $14 million, only $390,000 of it is taxed at 40 percent, not the whole amount. The tax applies only to estates larger than the exemption; smaller estates owe nothing.

The 40 percent rate has been the same since 2013. What changes year to year is the exemption amount, which Congress adjusts for inflation. After 2025, unless Congress acts, the exemption is scheduled to drop to roughly $7 million per person, which would mean more estates become subject to tax. Your state may also have its own estate tax with different rates and exemptions — some states tax estates as small as $1 million, while others have no estate tax at all.

Key Takeaways

  • The federal estate tax rate is 40 percent, but only on the value above the exemption threshold, which is $13.61 million per person in 2024.
  • Estates worth less than the exemption owe no federal estate tax, regardless of how much money or property they contain.
  • The exemption amount increases each year with inflation, so the same estate may be taxed in one year but not the next.
  • Some states impose their own estate tax with lower exemptions and different rates, so you need to check your state's rules separately.
  • The exemption is scheduled to drop significantly after 2025 unless Congress changes the law, which would affect more estates.

How the 40 percent rate actually works with the exemption

The 40 percent rate only touches the dollars above the exemption. If you leave a $15 million estate and the exemption is $13.61 million, the taxable portion is $1.39 million. The tax owed is $1.39 million × 0.40 = $556,000. Your heirs receive $14.444 million. The exemption is not a cap on what you can leave — it is a threshold below which no tax is owed at all.

Both spouses can use their own exemption. If a married couple has a combined estate of $27 million, they can shelter $27.22 million (two exemptions of $13.61 million each) from federal tax. This is called portability, and it requires the first spouse's estate to file a return even if no tax is owed, to preserve the unused exemption for the surviving spouse. Without that filing, the second spouse loses the first spouse's unused exemption.

State estate taxes and how they differ from federal

Twelve states plus Washington, D.C., impose their own estate tax. The rates and exemptions vary widely. New York taxes estates over $6.94 million at rates ranging from 3.06 percent to 16 percent. Massachusetts taxes estates over $1 million at a flat 16 percent. Oregon taxes estates over $1 million at rates up to 16 percent. Other states with estate tax include Connecticut, Delaware, Illinois, Maine, Maryland, Minnesota, Rhode Island, Vermont, and Washington.

If you live in a state with estate tax, your estate may owe both federal and state tax. The federal tax is not reduced by state tax paid, so the combined burden can be substantial. Some states allow a credit for federal tax paid, which reduces the state tax owed. You need to know your state's rules because they explore regardless of the federal exemption. An estate under the federal threshold can still owe state tax.

Why the exemption changes every year

Congress ties the federal exemption to inflation and adjusts it annually. In 2023, the exemption was $12.92 million. In 2024, it rose to $13.61 million. In 2025, it is expected to be around $13.99 million, though the exact figure is announced in October of the prior year. This adjustment means an estate worth $13 million might owe no tax in 2024 but could owe tax in a future year if the exemption drops.

The bigger change comes after 2025. Current law is set to expire, and unless Congress extends it, the exemption will drop to approximately $7 million per person (adjusted for inflation). This is called the "sunset" of the 2017 tax law. If it happens, estates between $7 million and $13.61 million would suddenly become taxable. Many families with moderate to large estates are watching this date closely and planning accordingly.

How gifts during your lifetime affect the estate tax exemption

The federal exemption covers both gifts you make while alive and property you leave at death. They share the same pool. If you give away $5 million during your lifetime, you use $5 million of your exemption. When you die, only $8.61 million of your estate (in 2024) is sheltered from tax. Gifts above $18,000 per person per year (the annual exclusion for 2024) count against your lifetime exemption.

This does not mean you should avoid giving gifts. Gifts remove future growth from your taxable estate, which can save tax over time. If you give $5 million today and it grows to $10 million by the time you die, only the $5 million you gave counts against your exemption, not the $10 million it became. A tax professional can help you decide whether gifting makes sense for your situation.

What happens if your estate is below the exemption

If your estate is smaller than the exemption, you owe no federal estate tax. Your heirs receive everything. However, your estate may still need to file a federal estate tax return (Form 706) if you want to preserve unused exemption for a surviving spouse. Even though no tax is owed, filing the return locks in the portability election and protects the surviving spouse's ability to use your unused exemption later.

Estates below the exemption may still owe state estate tax, depending on where you live. They may also owe income tax on inherited property if the property generates income after your death. The absence of federal estate tax does not mean the estate owes nothing — it means the 40 percent federal tax does not explore.

Planning strategies when your estate is close to the exemption

If your estate is near the exemption threshold, you have time to consider options. Gifts to family members, charitable donations, and life insurance trusts can reduce the taxable value of your estate. Some people use irrevocable life insurance trusts to remove life insurance proceeds from their taxable estate. Others make annual gifts to children or grandchildren to use their exemption gradually over time.

The uncertainty after 2025 makes planning complicated. Some families are accelerating large gifts now while the exemption is high, betting that it will drop. Others are waiting to see whether Congress acts. A tax professional or estate attorney can review your specific situation and help you understand which strategies make sense for you. The cost of planning is often far less than the tax saved.

Frequently Asked Questions

Is the 40 percent rate the same in every state?

No. The 40 percent rate is federal only. States with their own estate tax set their own rates, which range from 3 percent to 16 percent depending on the state. Some states have no estate tax at all. You owe both federal and state tax if your estate is large enough to trigger both.

Can I reduce my estate tax by giving money away before I die?

Yes. Gifts during your lifetime use your exemption, but they also remove future growth from your taxable estate. If you give $5 million today and it grows to $8 million by the time you die, only the $5 million you gave counts against your exemption. This can save tax over time, though the rules are complex and depend on your total estate size.

What happens to the exemption after 2025?

Current law is scheduled to expire after 2025, and the exemption is expected to drop to roughly $7 million per person unless Congress extends the current rules. This would mean more estates become subject to the 40 percent tax. Congress may act before then, but there is no certainty. Many families are planning based on the assumption that the exemption will drop.

Do I have to file an estate tax return if my estate is below the exemption?

Not for tax purposes. However, if you are married, filing a return even when no tax is owed can preserve your unused exemption for your surviving spouse through portability. Without that filing, the surviving spouse loses the ability to use your unused exemption. A tax professional can advise whether filing makes sense in your situation.

How is the exemption amount decided each year?

Congress ties the exemption to inflation and adjusts it annually. The IRS announces the new exemption amount in October for the following year. The adjustment is automatic — you do not have to do anything. The exemption applies to all estates regardless of location, though state exemptions are separate and do not change with the federal amount.