Understanding the Federal Estate Tax: What You Need to Know

What is the Federal Estate Tax?

The federal estate tax, often referred to as the “death tax,” is imposed on the assets of a deceased individual. This tax is calculated based on the total value of the estate, and it currently ranges from 18% to 40%. As of 2025, the tax primarily applies to estates exceeding $13.99 million, while in 2026, this threshold increases to $15 million. The estate tax is crucial for understanding how much your heirs might owe when inheriting wealth.

Estate Tax Exemptions for 2025 and 2026

The estate tax exemption is allocated per person, meaning that married couples can effectively double this amount. Moreover, several states impose their own estate taxes, typically with lower asset thresholds than the federal limit. This means that individuals may be liable for state-level estate taxes even if their estates fall below the federal threshold.

To determine whether your state has an estate tax, consult the estate tax chart specific to your region and check your state’s department of revenue and taxation for the most current information.

How the Federal Estate Tax Works

The federal estate tax is based on the fair market value of an individual’s assets at the time of death, rather than their original purchase prices. Generally, assets that pass to a surviving spouse are excluded from the estate tax due to the unlimited marital deduction. The IRS Form 706 provides detailed information on which assets are taxable and how to assess their value.

Estate Tax Rates and Limits

The estate tax is structured in a tiered format, with different brackets for varying amounts. Here’s an overview of the current rates:

• $1,800 + 20% of the amount over $10,000
• $3,800 + 22% of the amount over $20,000
• $8,200 + 24% of the amount over $40,000
• $13,000 + 26% of the amount over $60,000
• $18,200 + 28% of the amount over $80,000
• $23,800 + 30% of the amount over $100,000
• $38,800 + 32% of the amount over $150,000
• $70,800 + 34% of the amount over $250,000
• $155,800 + 37% of the amount over $500,000
• $248,300 + 39% of the amount over $750,000
• $345,800 + 40% of the amount over $1,000,000

Which States Have an Estate Tax?

Many states impose their own estate tax, often with lower asset limits compared to the federal system. Familiarize yourself with your state’s estate tax regulations, as these taxes can significantly impact your overall estate planning. If you reside in a state with an estate tax, the good news is that your estate tax bill can usually be deducted from your taxable estate value before calculating any federal tax obligations.

Difference Between Inheritance Tax and Estate Tax

It’s important to understand the distinction between inheritance tax and estate tax. While estate taxes are levied on the deceased person’s estate as a whole, inheritance taxes are paid by the heirs when they receive the inherited assets. Notably, inheritance tax rates often depend on the heir’s relationship to the decedent, with surviving spouses typically exempt from this tax. Currently, five states impose an inheritance tax, and one state collects both estate and inheritance taxes.

Strategies to Reduce or Avoid the Federal Estate Tax

If you’re looking to minimize estate taxes before your passing, consider these strategies:

1. Spending Your Assets: Enjoy your wealth during your lifetime rather than leaving a larger estate.

2. Gifting to Loved Ones: Give away portions of your estate as gifts while alive, as many states do not tax gifts.

3. Charitable Contributions: Donations to qualifying charities can reduce your gross estate and, in turn, your estate tax.

4. Establishing Trusts: Using irrevocable trusts can legally shelter some assets from estate taxes.

5. Relocating: Moving to a state without estate or inheritance taxes provides additional tax relief options.

Watch for Capital Gains Tax on Inherited Assets

It’s worth noting that even if inheriting assets is not taxed at the time of receipt, any income or capital gains generated from those assets in subsequent years may still be taxable. When heirs sell inherited assets, profits may be subject to federal capital gains tax, depending on the timing of the sale. Consulting a financial advisor is recommended for inherited bequests to strategize on minimizing potential capital gains taxes.

Final Thoughts

The federal estate tax plays a significant role in estate planning and can substantially impact the assets left to heirs. Understanding the nuances of these taxes, including exemptions, rates, and state-specific regulations, is vital for effective financial planning. Taking proactive steps can help ensure that your wealth is passed down in the most tax-efficient manner possible.