Estate tax: What it is, who pays, and current rates

If you’re planning your estate or handling a loved one’s, you may wonder: Will the IRS take a portion of what’s left behind? The answer depends on the size of the estate and where the deceased lived.

The federal estate tax only applies to large estates (those valued at over $13.99 million for tax year 2025); however, some states have their own rules, which can also affect smaller estates. Understanding how the estate tax works can help you plan ahead and protect your legacy.

Let’s break down what the estate tax is, how it works, and what you can do to minimize it.

What is the federal estate tax?

The federal estate tax is a tax on the transfer of property after someone dies. It’s based on the total value of everything the person owned or had an interest in at the time of death—called their gross estate.

This tax is paid by the estate itself, not the heirs. So, if you inherit money or property, you typically don’t pay estate tax directly. Instead, the estate pays the tax before distributing assets to beneficiaries.

The estate tax is sometimes referred to as the “death tax,” but it’s actually a tax on the transfer of wealth. It’s designed to apply only to the largest estates—those worth millions of dollars. Most people won’t ever owe it.

What assets are subject to the estate tax?

The estate tax can apply to a wide range of assets, including:

• Real estate (primary residences, vacation homes, investment properties)
• Bank accounts and cash
• Stocks, bonds, and mutual funds
• Retirement accounts (like IRAs and 401(k)s)
• Life insurance proceeds (if the deceased had ownership)
• Business interests
• Personal property (vehicles, jewelry, collectibles, furniture)

It’s important to note that the IRS considers the fair market value of assets to determine the gross estate—not the original purchase price. Additionally, assets held jointly or in a trust may be included, depending on how they’re structured.

How does estate tax work?

Once the gross estate is calculated, certain deductions are allowed to arrive at the taxable estate. These deductions may include:

• Debts and mortgages
• Funeral and administrative expenses
• Property left to a surviving spouse
• Charitable donations

In some cases, estates that include family farms or closely held businesses may qualify for special valuation reductions.

After calculating the taxable estate, the IRS adds the value of any lifetime taxable gifts—gifts made since 1977 that exceeded the annual exclusion limit to individuals (See “Estate and gift tax” below). The estate tax is then reduced by the unified credit (also sometimes referred to as the “lifetime exclusion”) for estates and gifts, which effectively shelters up to $13.99 million from tax in 2025.

If the value of the estate exceeds the exemption, the executor must file Form 706 and pay any tax due within nine months of the date of death. In addition, a surviving spouse may elect to add any unused exemption to their own by filing a Form 706 and electing portability.

Estate and gift tax

The estate tax and gift tax are linked. The IRS allows individuals to give away a certain amount each year—$19,000 per recipient in 2025—without affecting their lifetime exclusion. Gifts above that amount are considered taxable and must be reported on a gift tax return (Form 709).

Generally, the following types of gifts are not considered taxable:

• Gifts to a spouse
• Gifts to charitable or political organizations
• Payments made directly to medical or educational institutions (i.e., paying someone’s tuition or medical expenses)

The unified credit is a tax credit that offsets the amount of federal estate or gift tax you might owe. It’s called “unified” because it applies to both lifetime gifts (subject to gift tax) and transfers at death (subject to estate tax).

Let’s look at an example of how the unified credit works in practice:

You give away $5 million in taxable gifts (above the annual per-person exclusion limit) during your lifetime. That $5 million uses up part of your unified credit.

If you pass away in 2025, your estate can only shield $8.99 million from estate tax as outlined below.

 $13.99 million (lifetime exclusion)
– $5 million
= $8.99 million (remaining exemption).

Related: Gift tax: How much is gift tax and who pays it?

Estate tax rates 2025

For 2025, the federal estate tax exemption is:

• $13.99 million per individual
• $27.98 million for married couples (with proper planning)

Only the estate value above the exemption amount is taxed. The tax rate is progressive, ranging from 18% to 40%.

Here’s an example for an estate valued at $15 million in 2025:

• The taxable portion is the amount over 13.99 million. $15 million − $13.99 million = $1,010,000
• From the estate tax rate table, a taxable estate of $1.1 million falls into the highest bracket.
• For this bracket, the base tax is $345,800.
• The marginal rate is 40% of the amount over $1 million.
  • Amount over $1 million = $1,010,000−$1,000,000= $10,000
  • Marginal tax = 40% × $10,000 = $4,000
• Total estate tax = $345,800 + $4,000 = $349,800

Is there a state estate tax?

Yes, some states impose their own estate taxes. As of 2025, 12 states and the District of Columbia levy an estate tax. State estate tax exemption amounts are often significantly lower than the federal exemption, meaning that smaller estates may be required to pay taxes to their state government.

2025 state estate tax exemptions

How to minimize the federal estate tax

If your estate is likely to exceed the federal exemption, there are several strategies to reduce or avoid estate tax:

• Make annual gifts: You can give up to the annual exclusion per person per year without triggering gift tax. In 2025, the annual exclusion is $19,000.
• Donate to charity: Charitable contributions can reduce the size of your taxable estate.
• Use trusts: Irrevocable trusts can help remove assets from your estate.
• Spend down your estate: Using your assets during your lifetime can reduce the amount subject to estate tax.
• Leave assets to a spouse: The unlimited marital deduction allows you to transfer assets tax-free to a surviving spouse.
• Plan early: Estate planning strategies are most effective when initiated well in advance.

Estate tax vs. inheritance tax: What’s the difference?

Understanding the difference between estate tax and inheritance tax can be difficult at first, since they both involve taxes related to someone’s death. However, these two taxes are quite different in who pays them and how they’re applied:

• Estate tax is paid by the estate before heirs receive anything. It exists at the federal level and in some states.
• Inheritance tax is paid by the person who inherits the money or property. It only exists at the state level, and only five states (Iowa, Kentucky, Nebraska, New Jersey, and Pennsylvania) levy it.

Inheritance tax is often based on the relationship between the deceased and the beneficiary (specifics vary by state). For example, close relatives, such as spouses and children, may pay lower rates—or none at all—while other relatives or unrelated heirs may owe more.

In addition to estate or inheritance taxes, estates may also need to file:

• A final income tax return (Form 1040) for the deceased
• An income tax return for the estate (Form 1041) if it earns income after death

Related: Is inheritance taxable?

Get help navigating estate taxes

Estate taxes can be complex, but you don’t have to navigate them alone. Whether you’re planning your own estate or managing someone else’s, H&R Block’s tax professionals can help you understand your options and make informed decisions. You can search for an expert in estates and gifts by entering your zip code, choosing an office, and searching by expertise. Rather do it yourself? H&R Block Online can walk you through how to file Form 1041. Either way, we’ll help you protect your legacy and minimize your tax burden.