Estate Tax Guide: Federal and State Estate Tax Explained
Most Americans will never owe federal estate tax thanks to the generous exemption. But state estate and inheritance taxes catch many families by surprise. This guide explains both systems, every state that imposes these taxes, and what you need to know as an executor or beneficiary.
2025 Key Numbers
$13.99M
Federal exemption per person
40%
Federal tax rate above exemption
12 + DC
States with estate tax
6
States with inheritance tax
Federal Estate Tax
The federal estate tax applies to the total value of a deceased person's assets (the "gross estate") minus deductions. The gross estate includes everything the person owned at death: real estate, investments, bank accounts, business interests, life insurance owned by the deceased, and personal property.
For 2025, the federal estate tax exemption is $13,990,000 per individual. Only the portion of the estate exceeding this threshold is taxed, at a flat rate of 40%.
Important: 2026 Sunset
The current high exemption was established by the Tax Cuts and Jobs Act of 2017 and is scheduled to expire after December 31, 2025. Unless Congress extends it, the exemption is expected to drop to approximately $7 million (adjusted for inflation) starting in 2026. If your estate may be affected, consult with an estate planning attorney before the end of 2025.
Common Deductions
- Marital deduction: Assets passing to a surviving U.S. citizen spouse are fully deductible. There is no limit.
- Charitable deduction: Assets left to qualified charities are fully deductible.
- Debts and expenses: The estate can deduct mortgages, other debts, funeral expenses, and estate administration costs.
- State death taxes: State estate taxes paid are deductible on the federal return.
Portability: Claiming Your Spouse's Unused Exemption
Portability is one of the most valuable estate planning tools available to married couples. It allows a surviving spouse to "inherit" the unused portion of the deceased spouse's federal estate tax exemption.
Example
Spouse A dies in 2025 with an estate of $4,000,000. Their federal exemption is $13,990,000, so $9,990,000 of the exemption is unused. If the executor files Form 706 to elect portability, the surviving Spouse B can add $9,990,000 to their own $13,990,000 exemption, giving them a total exemption of $23,980,000.
Without filing Form 706, the unused exemption is lost forever.
How to elect portability: The executor must file IRS Form 706 (United States Estate Tax Return) within 9 months of the date of death. A 6-month extension is available by filing Form 4768. Even if the estate owes no tax, filing Form 706 is required to preserve portability.
Note: Portability applies only to the federal estate tax. Most states with their own estate tax do not offer portability, meaning the state exemption of the first spouse to die may be lost if not used. Hawaii and Maryland are notable exceptions that do allow portability.
States with Estate Tax
Twelve states and the District of Columbia impose their own estate tax, separate from the federal estate tax. State exemptions are typically much lower than the federal exemption, meaning some estates that owe no federal tax may still owe state estate tax.
| State | Exemption | Tax Rate |
|---|---|---|
| Connecticut | $13,990,000 | 12% |
| District of Columbia | $4,528,800 | 11.2% - 16% |
| Hawaii | $5,490,000 | 10% - 20% |
| Illinois | $4,000,000 | 0.8% - 16% |
| Maine | $6,410,000 | 8% - 12% |
| Maryland | $5,000,000 | 0.8% - 16% |
| Massachusetts | $2,000,000 | 0.8% - 16% |
| Minnesota | $3,000,000 | 13% - 16% |
| New York | $6,940,000 | 3.06% - 16% |
| Oregon | $1,000,000 | 10% - 16% |
| Rhode Island | $1,774,583 | 0.8% - 16% |
| Vermont | $5,000,000 | 16% flat |
| Washington | $2,193,000 | 10% - 20% |
Watch Out for Estate Tax "Cliffs"
Massachusetts and New York have what is known as a "cliff" structure. In Massachusetts, if the estate exceeds $2,000,000, the entire estate is taxed (not just the amount above the exemption). In New York, if the estate exceeds 105% of the $6,940,000 exemption ($7,287,000), the entire estate is taxed. This cliff can create a situation where an estate worth $6,940,001 owes zero, but an estate worth $7,287,001 owes tax on the full amount.
States with Inheritance Tax
Inheritance tax is different from estate tax. While estate tax is paid by the estate before distribution, inheritance tax is paid by the person who receives the inheritance. The rate depends on the recipient's relationship to the deceased. Closer relatives typically pay lower rates or are exempt entirely.
Six states impose an inheritance tax. In all of these states, surviving spouses are exempt from inheritance tax.
Iowa
Being phased out. Fully repealed for deaths occurring on or after January 1, 2025.
Kentucky
Class A beneficiaries (spouse, children, parents, siblings) are exempt. Class B (nieces, nephews, in-laws): 4-8%. Class C (all others): 6-16%.
Maryland
Spouse, children, parents, grandparents, and siblings are exempt. All others: 10% flat rate. Only state with both estate and inheritance tax.
Nebraska
Spouse exempt. Parents, children, siblings: 1% over $100,000. Aunts, uncles, nieces, nephews: 11% over $40,000. All others: 15% over $25,000.
New Jersey
Class A (spouse, children, parents, grandchildren) exempt. Class C (siblings, son/daughter-in-law): 11-16% over $25,000. Class D (all others): 15-16% over $0.
Pennsylvania
Spouse exempt. Children under 21: 0%. Adult children and grandchildren: 4.5%. Siblings: 12%. All others: 15%.
Maryland is the only state that imposes both an estate tax and an inheritance tax. However, any inheritance tax paid is credited against the estate tax, preventing true double taxation on the same assets.
Lifetime Gifts and the Gift Tax
The federal gift tax and estate tax share a unified exemption. This means gifts made during your lifetime reduce the amount of estate tax exemption available at death.
- Annual gift exclusion (2025): $19,000 per recipient per year. Gifts up to this amount do not count against your lifetime exemption or require a gift tax return.
- Married couple split gift: A married couple can give $38,000 per recipient per year by "splitting" the gift.
- Education and medical exclusion: Payments made directly to educational institutions for tuition or to medical providers for medical expenses are excluded entirely, with no dollar limit.
- Gifts to charity: Unlimited; no gift tax applies.
- Gifts to spouse: Unlimited marital deduction for gifts to a U.S. citizen spouse.
Stepped-Up Basis: A Major Tax Benefit for Heirs
When you inherit assets, you receive a "stepped-up basis," meaning the tax basis of the asset is adjusted to its fair market value at the date of death. This can save heirs significant capital gains tax.
Example
Your parent bought a house in 1985 for $100,000. At the time of death, the house is worth $500,000.
Without stepped-up basis
If you sell for $500,000, your taxable gain would be $400,000 ($500,000 minus original $100,000 basis).
With stepped-up basis
Your basis is "stepped up" to $500,000. If you sell for $500,000, your taxable gain is $0.
When You Need to File Form 706
IRS Form 706 (United States Estate and Generation-Skipping Transfer Tax Return) must be filed when:
- The gross estate exceeds the federal exemption ($13,990,000 in 2025)
- The executor wants to elect portability of the unused exemption for the surviving spouse
- The decedent made taxable gifts during their lifetime that, combined with the estate, exceed the exemption
Filing Deadlines
Frequently Asked Questions
What is the federal estate tax exemption for 2025?
The federal estate tax exemption for 2025 is $13,990,000 per individual. Estates valued below this threshold owe no federal estate tax. The tax rate on amounts above the exemption is 40%. This exemption is set to decrease significantly (roughly by half) after December 31, 2025, when provisions of the Tax Cuts and Jobs Act expire, unless Congress acts to extend it.
Which states have an estate tax?
Twelve states and the District of Columbia impose their own estate tax: Connecticut, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, and Washington. State exemptions are generally much lower than the federal exemption, with Oregon having the lowest at $1,000,000.
What is the difference between estate tax and inheritance tax?
Estate tax is paid by the estate before assets are distributed to heirs. Inheritance tax is paid by the person who receives the inheritance. Six states impose an inheritance tax: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. Maryland is the only state with both an estate tax and an inheritance tax.
What is estate tax portability?
Portability allows a surviving spouse to claim the unused portion of the deceased spouse's federal estate tax exemption. For example, if the first spouse used only $4 million of their $13.99 million exemption, the surviving spouse could add the remaining $9.99 million to their own exemption. To claim portability, the executor must file Form 706 (Federal Estate Tax Return) within 9 months of death (with a possible 6-month extension), even if no tax is owed.
When do you need to file Form 706?
IRS Form 706 (United States Estate Tax Return) must be filed when the gross estate exceeds the federal exemption ($13,990,000 in 2025). It should also be filed to elect portability of the unused exemption to a surviving spouse, even if no tax is owed. The filing deadline is 9 months after the date of death, with a 6-month extension available by filing Form 4768.