Estate Tax: Rates, Exclusions, and Impact on Gifts and Inheritances

What is an estate tax?

An estate tax is a tax on the transfer of a deceased person’s estate. It is assessed on the estate’s fair market value (FMV) at death, and applies only to the portion that exceeds a statutory exclusion (exemption) amount. Estate taxes may be levied by the federal government and by some states.

Key points
* The federal estate tax applies only when an estate’s combined gross assets and prior taxable gifts exceed the federal exclusion.
* Assets transferred to a surviving spouse are generally exempt (unlimited marital deduction).
* Recipients may owe a separate inheritance tax in some states.

Federal estate tax (2024–2025)

• 2024 federal exclusion: $13.61 million ($13,610,000).
• 2025 federal exclusion: $13.99 million ($13,990,000).
  Estates with combined gross assets and prior taxable gifts above these thresholds must file a federal estate tax return and may owe tax on the amount above the exclusion.

State estate taxes

Some states impose their own estate taxes with lower exclusion amounts than the federal government. An estate that escapes federal tax can still be subject to state estate tax. Estates under $1 million are not taxed in any jurisdiction.

States with estate taxes (thresholds as of 2025)
* Connecticut: $13,990,000 (matches federal exemption)
* District of Columbia: $4,873,200
* Hawaii: $5,490,000
* Illinois: $4,000,000
* Maine: $6,800,000
* Maryland: $5,000,000
* Massachusetts: $2,000,000
* Minnesota: $3,000,000
* New York: $7,160,000
* Oregon: $1,000,000
* Rhode Island: $1,802,431
* Vermont: $5,000,000
* Washington: $2,193,000

Gift tax and tax‑planning basics

Gifting before death can reduce an estate’s taxable value, but the federal gift tax rules apply to lifetime gifts.

Annual gift exclusion
* 2024 annual exclusion: $18,000 per recipient.
* 2025 annual exclusion: $19,000 per recipient.
You can give up to these amounts to any number of recipients each year without reducing your lifetime exclusion or triggering gift tax.

Lifetime gift exclusion
Gifts above the annual exclusion are reported on IRS Form 709 and reduce your lifetime exclusion (the same pool used for the estate tax exemption). Example: if you gave $79,000 in 2024, the annual exclusion would shelter $18,000 per recipient; the remaining $61,000 would be reported on Form 709 and would reduce your lifetime/estate exclusion by $61,000 (reducing a $13,610,000 exclusion to $13,549,000 in that example).

The IRS treats transfers as gifts whether intended as such or not, so planning and reporting are important for high‑value transfers.

Estate tax vs. inheritance tax

• Estate tax: levied on the deceased person’s estate before distribution to beneficiaries.
• Inheritance tax: levied on beneficiaries after they receive assets; the beneficiary—not the estate—pays it.

There is no federal inheritance tax. State inheritance taxes vary by state, value of the inheritance, and the beneficiary’s relationship to the decedent.

States (current status)
As of 2025, inheritance taxes are levied by:
* Kentucky (small exemptions; rates vary)
* Maryland (also has an estate tax)
* Nebraska
* New Jersey
* Pennsylvania
Note: Iowa’s inheritance tax was repealed effective Jan. 1, 2025.

Typical thresholds (examples)
* Kentucky: $500–$1,000 (varies by class)
* Maryland: $50,000–$100,000 (varies by relationship/class)
* Nebraska: $25,000–$100,000
* New Jersey: $25,000
* Pennsylvania: $3,500

Common exemptions and rules
* Surviving spouses are exempt from inheritance tax in all these states.
* Domestic partners are exempt in New Jersey.
* Nebraska and Pennsylvania exempt descendants who are 21 or younger.
* Life insurance paid directly to a named beneficiary is usually not subject to inheritance tax (life insurance payable to the estate typically is included in the estate for estate tax purposes).

What counts as an estate?

An estate includes all assets and interests a person owns or controls at death: real property, personal property, securities, cash, business interests, and other holdings. The taxable value is based on FMV at death, net of allowable deductions.

Deductions that reduce estate tax

Common deductions that can lower estate tax liability include:
* Debts and mortgages owed by the decedent
* Estate administration expenses and losses
* Property passing to a surviving spouse (marital deduction)
* Charitable bequests to qualifying charities
* For qualifying cases, reduced valuations for certain closely held businesses or farms

Brief history and terminology

The U.S. first enacted an estate tax in 1797. The modern federal estate tax system dates from 1916. The estate tax is sometimes called a “death tax” in public discussion.

Conclusion

Estate tax applies to the transfer of an estate that exceeds statutory exclusions. For 2024 and 2025, federal exclusions are $13.61 million and $13.99 million respectively. State estate and inheritance taxes can introduce additional exposure depending on where the decedent lived and where beneficiaries reside. For high‑value estates, careful estate and gift‑tax planning—using annual exclusions, lifetime gifting strategies, and available deductions—can materially reduce tax liability and simplify the transfer of assets to heirs.