Do You Owe Estate or Inheritance Tax? Federal vs. State

For most families dealing with a loved one's estate, the answer to "do we owe estate or inheritance tax?" is no. The federal estate tax applies only to very large estates, and the exemption amount is set high enough that the vast majority of Americans will never encounter it. Some states layer on their own death taxes — sometimes with lower thresholds — but even then, most estates owe nothing. Here is how to figure out whether your situation is one of the exceptions.

The federal estate tax: who actually pays it

The federal estate tax is authorized under 26 U.S.C. § 2001 et seq. It is a tax on the transfer of a deceased person's taxable estate — paid by the estate itself, out of estate funds, before any heirs receive anything.

The central protection is the exemption amount: estates valued below that threshold owe no federal estate tax at all. Only the amount above the exemption is subject to the tax, and even then only after applicable deductions.

Congress sets the exemption amount, and it has changed significantly over the years — and is scheduled to change again. Do not rely on any specific dollar figure you have seen quoted in an article, conversation, or social media post. It may be out of date. Check the current exemption directly with the IRS at irs.gov before making any decisions or assumptions. The IRS publishes current estate and gift tax parameters, and that is the authoritative source.

Given how high the exemption has been set in recent years, only a small fraction of estates in the United States owe any federal estate tax. If you're genuinely unsure whether an estate might be close to the threshold, that uncertainty is itself a signal to get a professional assessment rather than guess.

The marital deduction and portability for married couples

Married couples get two significant federal protections. First, assets left outright to a surviving spouse are generally covered by an unlimited marital deduction — meaning no federal estate tax is owed on those transfers, regardless of amount.

Second, married couples benefit from portability: a surviving spouse can generally use any portion of the deceased spouse's federal exemption that was unused at death, effectively stacking both spouses' exemptions to shelter the combined estate from future estate tax.

There is a critical catch: portability is not automatic. The executor must file a timely federal estate tax return (Form 706) to make the portability election — even if no estate tax is owed at the time of the first death. Missing the filing deadline can permanently forfeit this benefit. If the decedent was married, flag this deadline immediately, regardless of the estate's size.

State estate taxes: a different picture

The federal government is not the only potential tax collector. Some states impose their own estate taxes, and state exemption thresholds are often significantly lower than the federal one. That means an estate can owe state estate tax even when it owes no federal estate tax at all.

A state estate tax works similarly to the federal version: it is calculated on the total value of the estate and is paid by the estate before distributions are made to heirs. Each state that has such a tax sets its own exemption amount, tax rates, and filing requirements. These details vary and change over time.

Because state death-tax laws change — states have repealed, modified, and occasionally enacted these taxes over the years — we won't list specific states here. To find out whether the decedent's state imposes an estate tax, check that state's department of revenue or department of taxation directly. If the decedent owned real property in multiple states, each state where property is located may have a claim on those assets under its own rules.

State inheritance taxes: taxing the beneficiary, not the estate

An inheritance tax is fundamentally different from an estate tax. Instead of taxing the estate as a whole, it taxes what each individual beneficiary receives. The beneficiary — not the estate — owes the tax.

Rates and exemptions typically depend on the relationship between the beneficiary and the decedent:

• Spouses are usually fully exempt
• Close relatives (children, parents, siblings) often pay lower rates or are also exempt
• More distant relatives or unrelated people typically face higher rates

Only a handful of states have an inheritance tax. Most states have neither an estate tax nor an inheritance tax. A small number have both. Check the relevant state's tax authority for current rules — and note that the beneficiary's state of residence may matter, not just the decedent's.

What heirs actually receive: income tax is different

A common source of confusion: heirs generally do not owe federal income tax on assets they inherit. Inherited assets receive a "stepped-up" basis for capital gains purposes — meaning the asset's tax basis is reset to its fair market value at the date of the decedent's death. If you later sell the asset, you are taxed only on appreciation above that stepped-up value, not on the full amount you received.

This is entirely separate from estate and inheritance tax. The estate pays estate tax (if any) before you receive anything. You pay inheritance tax (if your state has one) on what you receive. If you later sell the asset, income tax rules apply to the gain. These are three distinct tax systems — different triggers, different payers, different timing. Do not confuse them.

When a federal estate tax return may be required even if no tax is owed

Two situations require filing Form 706 even when the estate owes no federal estate tax:

• Portability election: As described above, a surviving spouse needs a timely return to preserve the ability to use the deceased spouse's unused exemption. Skipping the return means losing this benefit permanently.
• Estates above the filing threshold: Even if deductions bring the taxable estate to zero, a return may still be required if the gross estate exceeds the filing threshold. Check current IRS guidance for the applicable threshold and rules.

The deadline for Form 706 is generally nine months from the date of death, with a six-month extension available to file (but not to extend the time to pay any tax owed). Confirm the current deadline and requirements with the IRS, and do not miss this date if either situation applies.

Red flags that suggest getting professional help

Most estates do not need a tax attorney or CPA for death-tax purposes — because most estates owe none. But consider professional guidance if any of these apply:

• The estate's gross value is substantial, even if you believe it falls under the federal threshold — state thresholds can be significantly lower
• The decedent owned real property in more than one state
• The decedent was married and preserving portability is at stake
• The estate includes complex assets: closely held business interests, large retirement accounts, or interests in multiple trusts
• Beneficiaries live in states that impose an inheritance tax
• The will or trust documents are complex or involve ongoing trusts for children or other beneficiaries

What you can do right now

• Get a rough estimate of the estate's gross value — include all assets in the decedent's name, and check whether any life insurance is paid to the estate rather than a named beneficiary
• Look up the current federal estate tax exemption at irs.gov — do not rely on a number you recall or saw quoted elsewhere, as it may have changed
• Find out whether the decedent's state (and any state where they owned real property) imposes a state estate or inheritance tax by checking those states' departments of revenue
• If the decedent was married, flag the portability election and the nine-month filing deadline right away — missing it is hard to fix after the fact
• If the estate is potentially large enough to trigger any tax, or if any of the red flags above apply, consult a licensed estate attorney or CPA before distributing assets or filing returns

This is general legal information, not legal advice. Estate and inheritance tax law — federal and state — changes frequently and varies significantly by state. The federal exemption amount is set by Congress and is subject to change; always check current IRS guidance at irs.gov rather than relying on quoted figures. For guidance on your specific situation, consult a licensed estate attorney or tax professional and check your state's tax authority for current rules and thresholds.