The federal estate tax exemption went up again this year. Though, the higher IRS inflation-adjusted number may not come as a surprise to most.
However, 2025 will be a pivotal tax year. If the Tax Cuts and Jobs Act (TCJA) were left to expire, as of 2026, the estate exemption amount could revert to a lower base threshold. But with a Republican-led Congress likely to support many TCJA provisions, the high exemption may not be the last of its kind.
In the meantime, a higher exemption in the current year will save more estates from federal tax, which may save heirs the heartache of a higher tax bill.
Federal estate tax exemption in 2025
The federal estate tax doesn’t apply unless you hit a certain exemption amount.
- The exemption amount for people who pass away in 2025 is $13.99 million (up from $13.6 million last year).
- Married couples can expect their exemption to be $27.98 million (up from $27.22 million last year).
Federal estate tax rate
Only a certain percentage of estates will be subject to the federal estate tax. This is because the exemption is high for 2025.
However, estates valued over the tax amount will be taxed at a pretty hefty rate, with those exceeding more than $1 million ($14,990,000 or $28,980,000 combined for married couples) taxed at 40%.
Below is how much heirs can expect to pay based on an estate’s value:
State estate taxes
Some states may impose an estate tax of their own (and the exemption amounts aren’t always as generous as the federal estate tax exemption).
For instance, in Massachusetts, the state estate tax exemption is just $2 million and isn’t indexed for inflation.
A few states also impose an inheritance tax, which can leave a tax bill for your heirs on even small amounts of money.
Nebraska, for example, imposes an inheritance tax on adult children when their inheritances exceed $100,000. In Kentucky, nephews and nieces only receive a $1,000 exemption.
Estate tax exemption sunset in 2026
If Congress doesn't act, the federal estate tax exemption will sunset at the end of 2025. At that time, the exemption will drop to a base of $5 million (adjusted for inflation) in 2026. However, the exemption is indexed for inflation.
This means that, even if key TCJA provisions expire, the estate tax exemption will adjust yearly for inflation.
Once more, most tax-free gifts made before the lifetime gift and estate tax exemption drops won’t trigger higher tax bills in 2026 and beyond.
The future of the estate tax sunset
With Trump serving his second term as president and a Republican-led Congress poised to pass tax reform through reconciliation, many provisions of the TCJA will likely continue for some time.
The estimated $4.5 trillion reconciliation bill could provide for a full extension, or extend or raise only certain parts, of the TCJA.
However, extending the so-called "Trump tax cuts" could come at a hefty price; earlier in the year, a budget agenda was released by the House Ways and Means Committee that proposed ending the federal estate tax while slashing other tax benefits, like the interest deduction for student loans.
Some estimates put the cost of eliminating estate taxes in the proposed agenda at $370 billion over ten years.
U.S. Treasury Secretary Scott Bessent has told reporters, "We’ve got three legs to the President’s economic agenda, trade, tax, and deregulation, and we hope that we can have this tax portion done by Fourth of July."
That is an extension of House Speaker Mike Johnson's (R-La.) original Memorial Day deadline for the "One Big, Beautiful Bill."
Stay tuned for further developments.
