Estate taxes are one of the most misunderstood topics in personal finance. Social media is full of warnings that "the government takes 40%" when you die — a claim that is technically accurate in a narrow sense and wildly misleading in practice. Here is what actually happens.
The federal estate tax only applies to estates worth more than $13.61 million (2024 threshold). Fewer than 0.2% of estates in the United States owe it. Most families face no federal estate tax at all — but there are other taxes that do apply to many estates.
- Twelve states and DC have their own estate taxes, some starting as low as $1 million.
- Six states have an inheritance tax — paid by the person receiving assets, not the estate.
- Most estates do owe a final income tax return for the deceased, and some owe Form 1041.
The Short Answer: Almost No One Pays Federal Estate Tax
The federal estate tax rate is 40% — on the portion of the estate above the exemption threshold. That threshold in 2024 is $13.61 million per individual. For married couples using the portability election, the combined exemption is $27.22 million.
The IRS reports that fewer than 0.2% of estates in recent years have owed any federal estate tax. In raw numbers, out of roughly 3.5 million deaths per year in the United States, fewer than 7,000 estates pay this tax.
If your estate — including all assets, retirement accounts, real estate, business interests, and life insurance — is below $13.61 million, you owe no federal estate tax. The 40% figure that circulates on social media describes the marginal rate on taxable amounts above the exemption. It does not describe what most families experience.
Federal Estate Tax: How It Actually Works
The federal estate tax is calculated on the gross estate — the total fair market value of everything the deceased owned at death, including:
- Real estate (at full market value, not just equity)
- Bank and investment accounts
- Retirement accounts (IRA, 401(k), pension values)
- Life insurance proceeds where the deceased owned the policy
- Business interests
- Personal property (vehicles, art, jewelry)
From the gross estate, certain deductions are allowed:
- Marital deduction — assets passing to a surviving spouse are fully deductible; no estate tax is owed on those transfers at all
- Charitable deduction — assets left to qualifying charities are deductible
- Debts, funeral expenses, and estate administration costs
What remains after deductions is the taxable estate. The lifetime exemption ($13.61 million in 2024) is then applied. Only the amount above the exemption is taxed at 40%.
Example
A single person dies with a gross estate of $15 million. After deductions (debts, funeral costs), the taxable estate is $14.5 million. The exemption ($13.61 million) is subtracted, leaving $890,000 taxable. At 40%, the federal estate tax owed is approximately $356,000. That is not 40% of $15 million — it is 40% of the amount above the exemption.
The estate tax return (Form 706) is due nine months after death, with a six-month extension available.
State Estate Taxes: The More Likely Issue for Many Families
While the federal estate tax affects very few families, 12 states and the District of Columbia have their own estate taxes — and their exemption thresholds are significantly lower.
| State | Exemption Threshold | Top Rate |
|---|---|---|
| Oregon | $1,000,000 | 16% |
| Massachusetts | $2,000,000 | 16% |
| Washington | $2,193,000 (indexed) | 20% |
| Minnesota | $3,000,000 | 16% |
| Illinois | $4,000,000 | 16% |
| New York | $6,940,000 (2024) | 16% |
| Maryland | $5,000,000 | 16% |
| Hawaii | $5,490,000 (indexed) | 20% |
| Vermont | $5,000,000 | 16% |
| Connecticut | $13,610,000 (matches federal) | 12% |
| Maine | $6,800,000 (indexed) | 12% |
| Rhode Island | $1,774,583 (indexed) | 16% |
| District of Columbia | $4,528,800 (indexed) | 16% |
For families in Oregon or Massachusetts with a home, retirement accounts, and life insurance, an estate exceeding $1 million is entirely realistic — especially in high property value areas. State estate tax planning is a meaningful issue for middle-income families in these states in a way that federal estate tax simply is not.
If you live in one of these states, consult a local estate planning attorney. Strategies like irrevocable life insurance trusts (ILITs), gifting during life, and charitable planning can reduce or eliminate state estate tax exposure.
Inheritance Tax: Different from Estate Tax
Estate tax is paid by the estate before assets are distributed. Inheritance tax is different — it is paid by the person who receives the assets, based on who they are and what they received.
The federal government does not have an inheritance tax. Six states do:
| State | Exempt Recipients | Top Rate |
|---|---|---|
| Iowa | Spouses, children, grandchildren, parents | 6% (on distant relatives/others) |
| Kentucky | Spouses, children, grandchildren, parents | 16% |
| Maryland | Spouses, children, grandchildren, parents, siblings | 10% |
| Nebraska | Spouses, parents, children, siblings (partial) | 15% |
| New Jersey | Spouses, children, grandchildren, parents | 16% |
| Pennsylvania | Spouses; children exempt for transfers from parents only | 15% (on unrelated inheritors) |
Surviving spouses are exempt from inheritance tax in all six states. Direct descendants (children, grandchildren) are typically exempt or taxed at low rates. The higher rates usually apply to more distant relatives, friends, or unrelated individuals.
Maryland is the only state with both an estate tax and an inheritance tax.
The Taxes Most Estates Actually Face
Federal estate tax affects fewer than 1 in 500 estates. But there are taxes that apply to a much broader range of families — and these are the ones worth planning around.
Final income tax return
Every estate must file a final federal income tax return (Form 1040) for the deceased, covering income earned from January 1 through the date of death. A surviving spouse can file jointly for this final year, which often results in a lower tax bill. The return is due by April 15 of the following year.
Estate income tax (Form 1041)
If the estate earns income after death — interest, dividends, rental income, business income — the estate itself becomes a taxable entity. An estate income tax return (Form 1041) must be filed if the estate earns more than $600 in gross income. This is common in estates that take months or years to settle. A CPA or tax professional familiar with estate administration should handle this.
Income tax on inherited retirement accounts
This is the most significant tax exposure for many families. Traditional IRAs and 401(k)s are funded with pre-tax dollars. When money comes out, it is taxed as ordinary income — whether taken by the original owner or a beneficiary.
Under the SECURE Act rules, most non-spouse beneficiaries must withdraw the full balance of an inherited retirement account within 10 years of the original owner's death. Depending on the account size and the beneficiary's income, this can result in a substantial tax bill over that 10-year window.
Surviving spouses have more options: they can roll the account into their own IRA and defer distributions further. Get professional advice before taking any distribution from an inherited retirement account.
Capital gains on inherited property
When you inherit property — real estate, stocks, other investments — you receive a stepped-up cost basis equal to the property's fair market value at the date of death. This means any appreciation during the deceased's lifetime is not taxed when you inherit.
If you then sell the inherited property, you only pay capital gains tax on appreciation since the date of death, not since the original purchase. For property held for years or decades, this can eliminate a very large potential tax bill. The stepped-up basis rule is one of the most valuable provisions in estate law for ordinary families.
The Stepped-Up Basis Rule: What It Means for Heirs
This rule deserves its own section because it is both important and underappreciated.
Suppose your parent bought a home in 1985 for $80,000. At their death in 2024, the home is worth $500,000. If they had sold it during their lifetime, the $420,000 gain would have been subject to capital gains tax — potentially a significant bill.
When you inherit the home, your cost basis is reset to $500,000 — the fair market value at death. If you sell it for $510,000, you only owe capital gains tax on the $10,000 gain since you inherited it. The $420,000 in appreciation during your parent's lifetime is never taxed.
The stepped-up basis applies to most inherited assets: real estate, stocks, business interests. It does not apply to inherited retirement accounts (IRAs, 401(k)s), which follow the income tax rules described above.
Understanding this rule matters when deciding what to do with inherited property. In many cases, selling promptly after inheriting carries very little tax consequence. Holding for a long time and then selling may create a larger capital gains liability on the post-inheritance appreciation.
The 2025 Exemption Sunset: What to Watch
The current $13.61 million federal estate tax exemption was set by the Tax Cuts and Jobs Act of 2017. That provision is scheduled to expire at the end of 2025. If Congress does not act, the exemption reverts to roughly $7 million per person (adjusted for inflation from the pre-2018 level of $5.49 million).
For most families, this change is irrelevant — even $7 million is well above what they will ever accumulate. But for estates between $7 million and $13.61 million, this sunset creates potential tax exposure that does not currently exist.
If your estate may fall in that range, consult an estate planning attorney in 2024 or early 2025. Strategies like irrevocable trusts, charitable giving, and lifetime gifting (the annual gift tax exclusion is $18,000 per recipient in 2024) can reduce taxable estate value before the sunset takes effect.
For questions about whether an estate you are currently settling owes taxes, the probate process, or the executor's responsibilities, see How to Settle an Estate and What Is Probate?
Frequently Asked Questions About Estate Taxes
Does my estate have to pay taxes?
Most estates do not pay federal estate tax. The federal exemption for 2024 is $13.61 million per individual. Only estates above that threshold owe federal estate tax — fewer than 0.2% of estates. However, 12 states and DC have their own estate taxes with lower thresholds, some starting at $1 million. Your estate will almost certainly owe a final income tax return, and may owe Form 1041 if it earns income after death.
What is the federal estate tax rate?
The federal estate tax rate is 40% on the taxable portion — the amount above the $13.61 million exemption. Because the exemption is so high, the 40% rate affects very few estates. Claims that "the government takes 40%" when someone dies are misleading — that rate only applies to the portion above the exemption, and most estates never reach the exemption threshold.
What is the difference between estate tax and inheritance tax?
Estate tax is paid by the estate itself before assets are distributed. Inheritance tax is paid by the person receiving an inheritance. The federal government only has an estate tax. Six states have an inheritance tax: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. Surviving spouses are exempt from inheritance tax in all six states.
Do I owe taxes when I inherit money?
Generally no. Money or property you inherit is not treated as income for federal tax purposes. However, distributions from inherited traditional IRAs and 401(k)s are taxed as ordinary income. If you sell inherited property, you may owe capital gains tax on appreciation since the date you inherited — though the stepped-up basis rule eliminates tax on any appreciation during the deceased's lifetime.
What happens to the estate tax exemption after 2025?
The current $13.61 million exemption is scheduled to sunset at the end of 2025, reverting to approximately $7 million per person unless Congress acts. For estates between $7 million and $13.61 million, this could create tax exposure where none currently exists. If this affects your situation, consult an estate planning attorney before the end of 2025.
We reviewed this page against IRS publications and primary government sources. Tax thresholds and rules change annually — verify current figures at IRS.gov before making decisions.