Free Guide to Federal Inheritance Tax Information

What the Federal Estate Tax Actually Is (And Who It Might Affect)

When someone dies, their property, money, and possessions—collectively called their "estate"—pass to whoever they named in their will or trust, or to family members under state law if no will exists. The federal government doesn't tax most estates. This is the most important thing to understand right away.

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The federal estate tax only applies to estates larger than a certain threshold. For 2024, that threshold is $13.61 million per person. This means if someone dies with an estate worth less than $13.61 million, no federal estate tax is owed, regardless of how the money is distributed. The threshold changes yearly based on inflation adjustments.

Here's a concrete example: If a person dies with $8 million in assets—a house worth $500,000, investment accounts with $4 million, retirement accounts with $2 million, and personal property worth $1.5 million—no federal estate tax applies because the total is below the threshold. Their heirs receive everything without owing federal taxes on the inheritance itself.

The estate tax works differently from income tax. When you inherit money or property, you don't report it as income on your personal tax return. The person who died (or technically their estate) might have owed taxes, but the heirs generally don't pay income tax on what they receive. This confuses many people because they hear "inheritance tax" and assume they'll owe money when they inherit—usually, they won't.

Only about 0.1% of estates in the United States owe federal estate tax, according to IRS data. This means the vast majority of families don't encounter this tax at all. However, the threshold sometimes changes based on which political party controls Congress. In 2025, the threshold is set to drop to around $7 million per person unless Congress changes the law. Understanding whether your situation might involve this tax matters for planning purposes.

Practical Takeaway: Before worrying about federal inheritance taxes, find out the total value of the estate in question. Add up real estate, bank accounts, investments, retirement accounts, life insurance proceeds, and valuables. If that number is well below the current threshold, federal estate tax won't be an issue. If it's close to or above the threshold, that's when further information about how the tax works becomes useful.

How Federal Estate Tax Is Calculated When It Applies

When an estate does exceed the threshold, the tax isn't calculated on the entire estate amount. Instead, it's only calculated on the amount that exceeds the threshold. Think of it as a bracket system, similar to income tax brackets.

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For 2024, the federal estate tax rate is 40% on the amount over $13.61 million. Here's how this works with an example: Suppose someone dies with a $20 million estate. The calculation would be: $20 million minus $13.61 million equals $6.39 million subject to tax. At 40%, the estate tax owed would be $2.556 million. The heirs still receive the remaining $17.444 million.

This matters because many people overestimate what they'll actually owe. An estate worth $15 million doesn't pay 40% tax on the entire $15 million. It only pays tax on $1.39 million (the amount over the threshold). At 40%, that's $556,000 in federal estate tax.

Several items factor into the value of an estate for tax purposes, and some might surprise you. Life insurance proceeds that are payable to the estate count. Retirement accounts like IRAs and 401(k)s count. Investment accounts, real estate, vehicles, art, jewelry, and business interests all count. Even the value of someone's share in a partnership or closely held business gets included.

One major exception: money or property left to a surviving spouse generally doesn't count toward the estate tax, thanks to something called the "unlimited marital deduction." This means a person could leave millions to their spouse with no estate tax consequences. Similarly, donations to qualified charities can reduce the taxable estate. These strategies are why some wealthy families use trusts and other structures—not to avoid taxes illegally, but to structure how property transfers in ways that minimize tax.

The estate also gets to subtract certain debts and costs. Funeral expenses, outstanding mortgages, medical bills, and the cost of administering the estate can all reduce the taxable amount. This is one reason why working with someone who understands estate accounting can matter for large estates.

Practical Takeaway: The 40% estate tax rate only applies to the portion of an estate that exceeds the threshold. If an estate is $14 million in 2024, only $390,000 gets taxed. Understanding this math prevents the common mistake of thinking the entire estate gets taxed at that rate.

State-Level Inheritance and Estate Taxes: A Separate Picture

Federal estate tax isn't the only potential tax on inherited property. Seventeen states and the District of Columbia also impose their own estate or inheritance taxes. These are completely separate from the federal tax and work by their own rules. Understanding your state's position matters because you could owe nothing to the federal government but face a substantial state tax bill.

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State estate taxes use different thresholds than the federal tax. New York's threshold is $6.94 million per person (as of 2024). Connecticut's is $12.92 million. Massachusetts charges estate tax on estates over $1 million. Meanwhile, some states have no estate or inheritance tax at all, like Florida, Texas, and Wyoming. This geographic variation can actually influence where people choose to live in retirement—it's one real-world factor.

A few states (Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania) impose "inheritance taxes" instead of estate taxes. The distinction matters: an inheritance tax is paid by the person receiving the inheritance, while an estate tax is paid by the estate itself. More importantly, inheritance tax rates vary based on who inherits. A spouse inheriting might pay nothing, while a distant relative might pay a higher rate. In some states, friends who inherit pay the highest rates.

Here's a concrete scenario: Someone dies in New Jersey with a $3 million estate. Their nephew inherits $500,000. The federal government takes nothing (estate is under $13.61 million). But New Jersey imposes an inheritance tax on distant relatives. The nephew might owe approximately 15% on his $500,000 inheritance—roughly $75,000. That's significant money that someone only needs to know about if they understand New Jersey's rules.

The timing of state taxes differs too. While federal estate taxes are generally due nine months after death, state taxes may have different deadlines. Some states require estate tax returns to be filed regardless of whether tax is actually owed—similar to federal rules. Others only require a return if a federal return is filed. These procedural details matter when an estate is actually being settled.

One important note: federal and state taxes aren't simply added together with no relief. The federal tax system includes a "credit for state death taxes" in some cases, which prevents complete double-taxation. However, this credit has limitations and doesn't fully eliminate the combination of federal and state taxes in every situation.

Practical Takeaway: Find out what state the deceased person lived in (or owned real estate in, for some states). Look up that state's inheritance or estate tax rules. The state tax might actually be more relevant than the federal tax, depending on the state and the estate size. Several states have no such taxes at all, making that research worthwhile.

What Gets Included in an Estate (And What Doesn't)

Estate tax is calculated based on everything that person owned at death—but the rules about what counts are more complicated than people expect. Understanding what's included and excluded explains why some estates face taxes and others don't, even if their apparent "net worth" seems similar.

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Standard assets count: checking and savings accounts, investment accounts, real estate, vehicles, retirement accounts, and personal property like jewelry or artwork. Life insurance death benefits paid to the estate count, even though they might arrive months after death. Property held in the person's sole name counts. If someone co-owned property with someone else, generally only their share counts (though the rules vary by ownership type).

Retirement accounts deserve special attention because they're often larger than people realize, yet many don't think about them when estimating estate size. A person's entire 401(