Estate Tax: What You Need to Know | Capital One (2024)

When someone dies, the assets they leave behind are called an estate. And before those assets can be passed on to someone else, they may be taxed at federal or state levels. That’s called an estate tax.

But only estates worth above a certain amount have to pay federal estate taxes. And only 12 states—plus Washington, D.C.—have their own estate taxes.

Find out more about how federal and state estate taxes work, who has to pay estate taxes and the difference between estate taxes, inheritance taxes and gift taxes.

Key takeaways

• When someone dies, their assets become property of their estate.
• Only estates that are worth above a certain exemption threshold have to pay federal estate taxes.
• The federal estate tax rate ranges from 18% to 40% for the 2022 tax year, and the rate an estate pays depends on its worth.
• Estate taxes are paid by an estate, not by the heirs.
• Some states have their own estate taxes with rates and exemptions that vary by state.

According to the IRS, an estate tax is “a tax on your right to transfer property at your death.” And those taxes might come from federal or state levels.

But only some states have an estate tax. And the federal estate tax doesn’t apply to all estates. In fact, the vast majority of estates don’t have to pay any federal estate tax. For 2022, only estates worth above $12.06 million were subject to the federal estate tax. For 2023, the federal estate tax only applies to estates worth over $12.92 million.

But there’s even more nuance to understand.

Asset value

An estate’s assets are taxed based on their fair market value, which is typically what the assets are worth on the day the estate owner died.

That means that estates may have to pay taxes on assets that have appreciated in value since they were bought. But it also means that if assets went down in value since purchased, the estate only has to pay tax on what those assets are currently worth.

Exemption thresholds

Estate tax only applies to whatever remaining assets are above the IRS limits. So anything up to the exemption threshold isn’t subject to federal estate tax.

That means if someone’s estate was worth $13.06 million in 2022, for example, the estate tax would apply to only the $1 million that’s over the $12.06 million exemption threshold.

Beneficiaries

Whether estates are subject to the federal estate tax also depends on who inherits the estate and what their relationship to the deceased person is. For example, surviving spouses typically don’t have to pay estate tax on what they inherit from their spouse.

When a person dies, their assets generally become property of their estate. Those assets might include everything from cash, real estate and stocks to jewelry, works of art and more.

The first step toward determining if an estate is subject to estate taxes is calculating the entire estate’s value. That figure is called the gross estate. Typically, the gross estate is the sum of the fair market value of all of the estate’s assets.

Next, figure out the taxable estate value. That’s done by subtracting things like transfers to a surviving spouse, certain charitable contributions, debts, costs for administering the estate and more from the gross estate amount.

Once you know the taxable estate amount, you’ll know if it’s over the federal estate tax exemption limit. If it is, the estate will need to file an estate tax return and pay the required estate tax amount within nine months of the estate owner’s death. There also may be an option to apply for a six-month extension.

State estate taxes

In addition to the federal estate tax, Washington, D.C. plus 12 states have their own estate tax:

• Connecticut
• Hawaii
• Illinois
• Maine
• Maryland
• Massachusetts
• Minnesota
• New York
• Oregon
• Rhode Island
• Vermont
• Washington

Keep in mind that each state’s estate tax rates and exemption thresholds vary. And state exemption thresholds are often lower than federal ones.

Estate taxes are sometimes confused with inheritance taxes or gift taxes. But they’re not the same thing. Here’s how they differ.

Estate tax vs. inheritance tax

Estate taxes are paid by the estate itself before the assets are passed on to any heirs. Inheritance taxes, on the other hand, are paid by heirs once they receive the assets.

It’s also important to know that there is no federal inheritance tax. And only six states have an inheritance tax as of the 2022 tax year:

• Iowa
• Kentucky
• Maryland
• Nebraska
• New Jersey
• Pennsylvania

For the 2022 tax year, Maryland is the only state with both an inheritance tax and an estate tax.

For the 2022 tax year, the federal estate tax rate ranges from 18% to 40%, depending on how much of the estate exceeds the $12.06 million exemption threshold.

Here’s a breakdown of the federal estate tax rates for 2022:

What is the federal estate tax exemption in 2022?

As mentioned above, the federal estate tax exemption for 2022 is $12.06 million. That means that the federal estate tax doesn’t apply to estates worth less than that.

The IRS typically adjusts the exemption limit every year for inflation. In 2021, the exemption was $11.7 million. In 2023, it rises to $12.92 million. It’s important to note that in 2026, the exemption amount is set to drop to $5 million but will then be adjusted for inflation.

The estate itself—not the heirs—pays the estate tax before any assets are distributed. The estate typically has to file IRS Form 706 within nine months of the estate owner’s death. But there may be a six-month extension available for people who can’t file within that time frame.

Estate tax vs. gift tax

Gift tax is a federal tax on gifts worth above a certain threshold. The IRS defines a gift as “any transfer to an individual, either directly or indirectly, where full consideration (measured in money or money’s worth) is not received in return.”

The person giving the gift typically pays the gift tax. And one difference between an estate tax and a gift tax is that gift tax is charged while the gift giver is alive. And estate tax only applies after the estate owner has died.

The majority of estates are not subject to federal or state estate taxes. Only estates that exceed certain limits have to pay federal estate tax. And while state estate tax exemption thresholds are often lower, for the 2022 tax year, only 12 states and Washington, D.C. charge estate taxes at all.

If you have more questions about how estate taxes work, it might be a good idea to talk to a qualified tax professional. You can also find out more information about how to file taxes, how inheritance taxes work and what happens if you don’t pay your taxes.