How the estate tax works
The federal estate tax is a tax on the transfer of property at death, but it does not apply to the whole estate. Each person has a lifetime exemption — a large dollar amount that passes completely free of estate tax. Only the value above that exemption is taxed, and that excess is taxed at the top rate. So if an estate is worth a little more than the exemption, the tax applies to just the small surplus; the effective rate measured against the entire estate ends up far below the headline rate. The exemption is closely related to the lifetime gift exemption — the two share a single unified amount — so gifts made during life can reduce what is left to shelter at death. You can explore that side with ourgift tax calculator.
Worked example
Take a $20,000,000 gross estate against a $15,000,000 lifetime exemption, with the top rate at 40%. Only the slice above the exemption is taxed:
| Step | Amount |
|---|---|
| Gross estate | $20,000,000 |
| − Lifetime exemptioneverything up to this amount passes free of federal estate tax | $15,000,000 |
| = Taxable estateonly the value above the exemption is taxed | $5,000,000 |
| = Estate tax owed40% top rate on the taxable excess — an effective rate of just 10% of the whole estate | $2,000,000 |
Computed with this calculator's default settings — open the tool above and you'll see the same numbers, then adjust the exemption and rate for the year in question.
Why most estates owe nothing
Because the exemption runs into the millions of dollars per person, the vast majority of estates never reach it and owe no federal estate tax at all. Two features make it even harder for a couple to be caught. The unlimited marital deduction lets one spouse leave any amount to the other free of estate tax, and portability lets the surviving spouse carry over any unused exemption from the first spouse — so with planning a married couple can shelter close to twice the individual exemption. When inherited assets are later sold, a separate set of rules around cost basis comes into play; for that, see ourcapital gains calculator.
State estate and inheritance taxes
The federal tax is not the whole story. A number of states impose their own estate tax, and a few levy an inheritance tax paid by those who receive the assets. These state-level taxes frequently have much lower thresholds than the federal exemption, so an estate that owes nothing to the federal government can still face a bill at home. Both the federal exemption and the top rate change over time — the exemption is adjusted most years and the rules can be rewritten by legislation — so treat the result here as an estimate for illustration, not as tax or legal advice.
Frequently asked questions
How does the federal estate tax work?
The federal estate tax applies only to the value of an estate above a generous exemption amount. Everything up to the exemption passes free of estate tax; only the excess is taxed, and it is taxed at the top rate. So an estate worth a little more than the exemption owes tax on just that small surplus, while an estate worth less than the exemption owes nothing at all.
Why do most estates owe no estate tax?
Because the exemption is very large — in the millions of dollars per person — the overwhelming majority of estates fall below it entirely. Only a tiny fraction of estates are large enough to cross the threshold, and even those are taxed only on the portion above it. As a result, the effective rate on the whole estate is almost always far below the headline top rate.
What are the marital deduction and portability?
Assets left to a surviving spouse generally pass free of estate tax under the unlimited marital deduction. Separately, portability lets a surviving spouse add any unused portion of the first spouse’s exemption to their own, so a married couple can effectively shelter close to twice the individual exemption with proper planning.
Do states have their own estate or inheritance taxes?
Some do. A number of states levy their own estate tax, and a few impose an inheritance tax paid by the people who receive the assets. These state-level taxes often have much lower thresholds than the federal exemption, so an estate that owes nothing federally can still face a state tax. The rules and thresholds vary widely from state to state.
Are these figures fixed?
No. The exemption amount changes most years with inflation, and both the exemption and the top rate can be altered by legislation. The calculator lets you enter the current figures, but you should confirm them for the year in question. This tool is an estimate for illustration only and is not tax or legal advice.
Sources
The official figures this page quotes are drawn from the primary sources above — check them (or a qualified professional) before relying on a result.
Disclaimer: This calculator is foreducation and illustration only. Estate tax exemptions and rates change from year to year and vary by state, and individual circumstances differ widely. The figures it produces are estimates, not a determination of any actual tax owed. Nothing here is tax, legal, or financial advice — consult a qualified professional for your situation.