Inheritance Tax vs Estate Tax 2026 — What's the Difference?

Federal Estate Tax Overview

The federal estate tax is a tax on the right to transfer property at death. It is imposed on the total value of everything a person owned or had an interest in at the time of death (the "gross estate"), minus allowable deductions. The estate tax is paid by the estate itself before any assets are distributed to beneficiaries.

The estate tax is often called the "death tax," but this label is misleading for most Americans. The key fact to understand is that the federal estate tax applies only to a tiny fraction of estates — fewer than 0.2% of all estates pay any federal estate tax. The vast majority of estates pass completely tax-free to heirs.

The estate tax was temporarily eliminated in 2010 (a one-year repeal) but has been in continuous effect for all other years. Since 2011, the exemption has been adjusted periodically. The Tax Cuts and Jobs Act (TCJA) of 2017 roughly doubled the exemption, bringing it to the current ~$14 million level. This doubling is scheduled to expire at the end of 2025.

Use our tax refund calculator to understand how estate tax planning fits into your overall financial picture.

2025 Exemption and 2026 Sunset

For 2025, the federal estate tax exemption is $13,990,000 per individual ($27,980,000 for married couples with portability). This means a single person can leave up to $13.99 million to their heirs without any federal estate tax. A married couple can pass up to $27.98 million tax-free through proper planning and portability elections.

The exemption is portable between spouses — the unused portion of the first spouse's exemption transfers to the surviving spouse (see portability section below). This doubles the effective exemption for married couples regardless of which spouse dies first.

Estate Tax Rates

The federal estate tax uses a graduated rate schedule with a top rate of 40%. The rates apply only to the amount of the estate that exceeds the exemption. Here is the rate structure for 2025:

In practice, because the exemption is so high, the effective marginal rate on the taxable portion of most estates is 40%. The graduated brackets apply only to the first $1 million above the exemption, which is a small fraction of the taxable amount for large estates.

For example, an estate worth $15 million (with a $13.99 million exemption) would owe tax on $1.01 million. The tax would be approximately $345,800 — an effective rate of about 34% on the taxable portion, but only 2.3% on the total estate.

What Counts in the Gross Estate

The gross estate includes virtually everything the decedent owned or had an interest in at the time of death. The IRS defines the gross estate broadly to prevent wealthy individuals from hiding assets.

Items included in the gross estate:

• Real estate — Homes, land, rental properties, vacation homes (valued at fair market value)
• Bank accounts and cash — Checking, savings, money market, CDs, and physical cash
• Investment accounts — Stocks, bonds, mutual funds, ETFs, brokerage accounts
• Retirement accounts — IRAs, 401(k)s, 403(b)s, pensions (the full account balance, though income tax treatment differs)
• Life insurance — Proceeds from life insurance policies if the decedent owned the policy or had incidents of ownership
• Business interests — Ownership in sole proprietorships, partnerships, LLCs, and closely held corporations
• Vehicles, boats, aircraft — Personal property valued at fair market value
• Personal property — Jewelry, art, collectibles, furniture, antiques
• Trust assets — Assets in certain trusts where the decedent retained control or benefits
• Gifts within 3 years of death — Certain gifts made within 3 years of death (including life insurance policy transfers) are "clawed back" into the estate

Deductions from the gross estate include funeral expenses, estate administration costs, debts and mortgages, charitable bequests, and the marital deduction for property passing to a surviving spouse. The result after deductions is the taxable estate.

Portability of Exemption

Portability allows the unused estate tax exemption of a deceased spouse to transfer to the surviving spouse. This means a married couple can effectively use both exemptions even if the first spouse dies without using any of their exemption. Without portability, a couple that failed to do proper estate planning could lose the first spouse's exemption entirely.

To elect portability, the executor must file Form 706 (United States Estate and Generation-Skipping Transfer Tax Return) within 9 months of death (with a 6-month extension available to 15 months). The form is required even if the estate is below the filing threshold and owes no estate tax.

The portability election is a one-time opportunity. If the estate fails to file Form 706 within the required timeframe, the exemption is lost permanently. The IRS allows late portability elections within 5 years of death under certain circumstances using streamlined procedures, but after 5 years the exemption is gone.

Marital Deduction

The marital deduction allows an unlimited amount of property to pass from one spouse to the other spouse tax-free, either during life (gift tax marital deduction) or at death (estate tax marital deduction). This means a married person can leave their entire estate to their surviving spouse with zero estate tax, regardless of the size of the estate.

The marital deduction is not an exemption — it is a deferral of estate tax. The property that passes to the surviving spouse tax-free will generally be included in the surviving spouse's estate when they die (unless it is consumed or given away during their lifetime). For this reason, the marital deduction is sometimes called the "I-love-you" estate plan — it defers all tax to the second death.

Proper estate planning for married couples typically uses a combination of the marital deduction (for assets passing to the surviving spouse) and the exemption (for assets passing to a credit shelter trust for children or other beneficiaries). This ensures both spouses' exemptions are fully used while minimizing taxes on the second death.

State Estate Taxes

In addition to the federal estate tax, 12 states and the District of Columbia impose their own state-level estate tax. These taxes apply at much lower exemption levels than the federal tax, so they affect far more estates. Here is the list of state estate tax jurisdictions and their exemption amounts for 2025:

Massachusetts and Oregon have the lowest exemptions at just $1 million, meaning a Massachusetts resident with a $1.5 million home and retirement accounts could face a state estate tax even though their federal estate is far below the $13.99 million federal exemption. State estate taxes are not deductible on the federal estate tax return (unlike prior law, where they were deductible before the TCJA).

Inheritance Tax States

An inheritance tax is fundamentally different from an estate tax. The inheritance tax is paid by each beneficiary based on the value of what they inherit and their relationship to the deceased. The estate pays nothing — the tax is owed by the person receiving the inheritance.

Only 6 states impose an inheritance tax:

• Iowa — Rates from 0% to 15%, with large exemptions for spouses (0%), children (varying), and lineal descendants
• Kentucky — Rates from 4% to 16%, with exemptions for spouses (0%), children ($500 exemption, then 4%), and more distant relatives pay higher rates
• Maryland — Has BOTH an estate tax (see above) AND an inheritance tax (10% for most beneficiaries except spouses and children who are exempt from the inheritance tax)
• Nebraska — Rates from 1% to 18%, with spouses exempt and rates increasing for more distant relatives
• New Jersey — Rates from 0% to 16%, with spouses, children, and grandchildren typically exempt or paying very low rates
• Pennsylvania — Rates from 0% to 15%, with spouses paying 0%, children paying 4.5%, and more distant relatives paying 12% or 15%

The key feature of inheritance tax: it is based on your relationship to the deceased. Spouses generally pay 0% or very low rates. Children and grandchildren pay low rates. Siblings, nieces/nephews, and non-relatives pay the highest rates. This makes inheritance tax planning more personal and situational than estate tax planning.

Inheritance Tax vs Estate Tax — Key Differences

Here is a direct comparison of the two taxes to help you understand which one applies in any given situation:

If you live in one of the inheritance tax states, you should be aware that your beneficiaries may owe tax on what they receive from your estate. This is separate from any estate tax that may also be due. Maryland is the only state with both an estate tax and an inheritance tax.

Step-Up in Basis at Death

Step-up in basis is one of the most valuable tax benefits in the estate tax system. When someone inherits an asset, their tax basis in that asset is generally the asset's fair market value at the date of death (or the alternate valuation date, 6 months after death, if elected). This "steps up" the basis from the original purchase price to the current value.

The practical effect: any capital gains that occurred during the deceased person's lifetime are permanently eliminated from taxation.

Example: Your grandmother bought stock for $10,000 fifty years ago. At her death, the stock is worth $500,000. If she sold the stock before death, she would owe capital gains tax on $490,000. But if she holds it until death, the heir's basis is $500,000. If the heir sells the next day for $500,000, there is zero capital gains tax.

This rule applies to all assets included in the gross estate, including real estate, stocks, bonds, business interests, and personal property. It does not apply to retirement accounts (IRAs, 401(k)s), which receive a different tax treatment (the heir inherits the decedent's basis and must pay income tax on distributions).

Estate Planning Strategies

For those with estates approaching or exceeding the exemption amounts, several planning strategies can minimize or eliminate estate and inheritance taxes:

Annual Gifting Program

Use the annual gift tax exclusion ($19,000 per recipient in 2025) to transfer wealth out of your estate tax-free. A couple could give $38,000 to each of 10 family members every year, removing $380,000 from their estate annually with no tax consequences and no use of lifetime exemption.

Credit Shelter Trust (Bypass Trust)

For married couples, a credit shelter trust ensures that the first spouse to die fully uses their exemption. Assets up to the exemption amount are placed in a trust for children (or other beneficiaries), bypassing the surviving spouse's estate. This preserves the exemption of the first spouse to die while allowing the surviving spouse to benefit from the trust assets during their lifetime.

Irrevocable Life Insurance Trust (ILIT)

An ILIT owns life insurance policies on your life. Because the trust, not you, owns the policies, the death proceeds are excluded from your estate. The trust can provide tax-free liquidity to pay estate taxes or support beneficiaries. This is one of the most common estate planning techniques for wealthy families.

Family Limited Partnership (FLP)

FLPs allow you to transfer business interests or investment assets to family members at reduced values due to lack of marketability and minority interest discounts. This can remove assets from your estate at a discount of 25-40%, effectively leveraging your exemption.

Charitable Trusts (CRT, CLT)

Charitable remainder trusts (CRTs) and charitable lead trusts (CLTs) allow you to benefit both charity and family while reducing estate taxes. A CRT provides income to you or your beneficiaries for a term of years, with the remainder going to charity, and provides an estate tax charitable deduction.

Examples

Example 1: Typical Estate — No Tax

Situation: A single person dies with a $2 million estate (home, retirement accounts, investments) in 2025. Result: zero federal estate tax. The estate is far below the $13.99 million exemption. Depending on the state, there may be a state estate tax if the state exemption is lower (e.g., Massachusetts would tax the excess over $1 million).

Example 2: Large Estate — Federal Tax Applies

Situation: A single individual dies with a $20 million estate in 2025. Result: The exemption covers $13.99 million. The taxable estate is $6.01 million. Using the rate table, the federal estate tax is approximately $2.4 million (roughly 40% effective rate on the excess). The estate must file Form 706 and pay the tax within 9 months of death.

Example 3: Married Couple with Portability

Situation: Spouse A dies in 2025 with a $10 million estate, all left to Spouse B. Result: The marital deduction defers all tax. Spouse A's unused $13.99 million exemption is portable to Spouse B. Spouse B files Form 706 to elect portability. Spouse B now has their own $13.99M plus Spouse A's $13.99M = $27.98M total exemption for their remaining lifetime and estate.

Example 4: Pennsylvania Inheritance Tax

Situation: A Pennsylvania resident dies leaving $500,000 to their adult child and $100,000 to a sibling. Result: The child pays 4.5% on their $500,000 inheritance = $22,500. The sibling pays 12% on their $100,000 inheritance = $12,000. Total inheritance tax: $34,500, paid by the beneficiaries. No federal estate tax (well under $13.99M) and no state estate tax (PA does not have one).

Frequently Asked Questions

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