Estate Tax

The calculation starts with the gross estate: the fair market value at death of everything the person owned or had certain interests in. That includes cash, investments, real estate, retirement accounts, business interests and life insurance the person owned. It includes non-probate assets too, such as accounts passing by beneficiary designation or transfer-on-death registration.

Deductions then produce the taxable estate: debts and mortgages, funeral and administration expenses, property passing to a surviving spouse, and bequests to charity. Next, taxable gifts made during life since 1977 are added back, which is how the gift tax and the estate tax share one exemption. A tentative tax is figured on that total using a rate schedule that runs from 18% to 40%, and the gift tax payable on those earlier gifts is subtracted.

Finally, the unified credit wipes out the tax on the first $15,000,000. The credit equals the tentative tax on exactly that amount, $5,945,800 in 2026, and every bracket below 40% ends at $1,000,000, so the practical result is simple: an estate with no prior taxable gifts owes 40% of each dollar of taxable estate above $15,000,000 and nothing below it.

The One Big Beautiful Bill Act, signed July 4, 2025, set the basic exclusion at $15,000,000 for 2026 and indexes it for inflation starting in 2027, replacing a scheduled drop to roughly half that level. It has no sunset date, although Congress can always change the law. For deaths in 2025 the exclusion was $13,990,000. Most estates owe nothing and file nothing, but the rules below decide when a return is needed even without tax.

Twelve states and the District of Columbia charge an estate tax for deaths in 2026: Connecticut, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont and Washington. Most start far below the federal exclusion; Washington, for example, taxes estates above $3,000,000. A household nowhere near owing federal tax can still owe a large state bill, and some state thresholds are not indexed for inflation.

A separate inheritance tax, charged on what each heir receives rather than on the estate as a whole, applies in a handful of states, including Pennsylvania, New Jersey and Kentucky. Rates depend on the heir’s relationship to the person who died, and spouses are exempt; Pennsylvania, for instance, charges 4.5% on transfers to children and grandchildren.

Where you live at death usually decides which state estate tax applies, although real estate is generally taxed by the state where it sits. Moving to another state is a legitimate planning lever, but domicile turns on facts such as where you live, vote and file taxes, not on a change of mailing address alone.

For most households the federal estate tax is not the binding constraint. At $15,000,000 per person, the bigger costs at death are usually income tax on inherited pre-tax accounts, which get no step-up in basis, and a possible state estate or inheritance tax. That shifts attention toward Roth conversions, which pay the income tax during life at your own rates, and toward leaving appreciated taxable assets whose basis resets at death.

For estates near or above the exclusion, the usual levers are these. Annual exclusion gifts move money out of the estate without touching the exemption, and larger gifts move future growth out, at the price of losing the step-up. Leaving pre-tax IRA money to charity avoids both estate tax and income tax on it. Life insurance owned by an irrevocable trust rather than by the insured stays out of the gross estate, although a policy transferred within three years of death is pulled back in. And married couples should consider filing Form 706 at the first death to elect portability even when no tax is due.

When an heir withdraws pre-tax money that was also subject to estate tax, a federal income tax deduction for the estate tax attributable to that income softens the double hit.