The federal estate tax exemption is the amount of money you can pass to heirs at death without owing any federal estate tax. For 2025, that amount is $13.99 million per person. Starting in 2026, the exemption jumps to $15 million per person thanks to legislation signed into law on July 4, 2025. Anything above the exemption is taxed at rates up to 40%.
How the Exemption Works
When someone dies, the IRS looks at the total value of everything they owned: real estate, investments, bank accounts, business interests, life insurance proceeds, and other assets. This is called the gross estate. If the gross estate’s value falls below the exemption amount, no federal estate tax is owed and, in most cases, no estate tax return needs to be filed.
If the estate exceeds the exemption, only the amount above the threshold gets taxed. For example, if someone dies in 2026 with an estate worth $17 million, the first $15 million is sheltered by the exemption. The remaining $2 million is subject to federal estate tax at graduated rates that top out at 40%. That means the vast majority of estates owe nothing, and even those that do only pay tax on the excess.
The Unified Gift and Estate Tax System
The exemption is not just an estate tax benefit. It’s a unified credit that covers both gifts made during your lifetime and assets transferred at death. The IRS applies a single rate schedule to your cumulative taxable gifts plus your taxable estate, then offsets the resulting tax with a credit based on the exemption amount.
Here’s what that means in practice: every dollar of exemption you use on lifetime gifts reduces the exemption available to your estate. If you give $3 million in taxable gifts during your life (above the annual gift tax exclusion, which lets you give a set amount per recipient each year without touching your lifetime exemption), your remaining estate tax exemption drops by $3 million.
One protective rule is worth noting. If you made large gifts when the exemption was high and the exemption later drops, the IRS uses the greater of the exemption that applied when you made the gifts or the exemption in effect at the date of death. In other words, you won’t be penalized retroactively for gifts made under a higher exemption.
How the $15 Million Exemption Came About
The Tax Cuts and Jobs Act of 2017 roughly doubled the estate tax exemption starting in 2018, raising it from about $5.5 million to $11.18 million per person. That increase was set to expire at the end of 2025, which would have sent the exemption back to roughly $7 million (the pre-2018 level adjusted for inflation).
Before that sunset could take effect, Congress passed the One, Big, Beautiful Bill, signed into law on July 4, 2025. The new law sets the basic exclusion amount at $15 million for 2026, effectively replacing the scheduled drop with an increase. Future years will adjust for inflation from that $15 million base.
Portability: Sharing the Exemption Between Spouses
Married couples can effectively double their combined exemption through a feature called portability. When the first spouse dies, any unused portion of their exemption (called the deceased spousal unused exclusion, or DSUE) can transfer to the surviving spouse. If neither spouse used any exemption during their lifetime, the surviving spouse could potentially shield up to $30 million from estate tax in 2026.
Portability is not automatic. The estate of the first spouse to die must file a federal estate tax return (Form 706) to elect it, even if the estate is small enough that no tax is owed and no return would otherwise be required. The return is due nine months after the date of death, with an automatic six-month extension available by filing Form 4768 before the deadline.
If the estate missed the deadline, a simplified late-filing option exists for estates that fall below the filing threshold. Under Revenue Procedure 2022-32, the executor can file a properly prepared Form 706 up to five years after the date of death, with a notation that the return is filed under that procedure. No fee is required. Estates that miss even that window, or that exceeded the filing threshold, face a more complicated process involving a private letter ruling request.
Skipping the portability election is one of the most costly oversights in estate planning. Filing the return is relatively straightforward, and the potential benefit to the surviving spouse is millions of dollars in tax-free transfer capacity.
What Counts in Your Gross Estate
The gross estate is broader than most people expect. It includes assets you own outright, like your home, cars, and brokerage accounts, but it also captures assets you may not think of as “yours” in the traditional sense. Life insurance proceeds on a policy you owned are included, even though the money goes directly to a beneficiary. Retirement accounts like IRAs and 401(k)s count. So do assets in revocable trusts, since you maintained control over them during your lifetime.
Certain deductions reduce the taxable estate. The most significant is the unlimited marital deduction: assets passing to a surviving U.S. citizen spouse are fully deductible, meaning no estate tax is owed on those transfers regardless of size. Charitable bequests are also fully deductible. Debts, funeral expenses, and administrative costs of settling the estate reduce the taxable amount as well.
Who Needs to Worry About It
At a $15 million per-person exemption ($30 million for a married couple using portability), fewer than 1% of estates will owe any federal estate tax. For most people, the exemption is large enough that federal estate tax is not a factor in their planning.
That said, several situations can push an estate closer to the threshold than you might expect. Rapidly appreciating real estate, a successful business, or large life insurance policies can add up quickly. People with estates in the $10 million to $15 million range should pay attention to how growth could push them above the line over the coming years. And keep in mind that some states impose their own estate or inheritance taxes with much lower exemptions, sometimes starting at $1 million or $2 million, so you may owe state-level tax even if your estate clears the federal threshold comfortably.