Sometimes after a loved one dies, we must deal with grief, funeral planning, and an estate. In some cases, we inherit assets from a deceased loved one. Unfortunately, not much in this life comes for free, and even the things we inherit can cost us. Whether you’re preparing your own estate or inheriting assets from someone else, it’s important to know what’s taxed, what isn’t, and what’s changed under recent laws, including the long-term impact of Trump’s One Big Beautiful Bill.
What Are Estate Taxes?
Estate taxes are federal taxes imposed on the total value of a person’s assets at death before those assets are distributed to heirs. These taxes apply to property, investments, business interests, and other valuables, all based on fair market value at the time of death.
However, most Americans will never pay federal estate taxes because of high federal estate tax exemptions. These were made permanent through Trump’s recent One Big Beautiful Bill. In 2025, the exemption is $13.99 million per person and in 2026 it is $15 million. This will be adjusted annually for inflation.
Federal Estate Tax Rates
If an estate exceeds the exemption amount, the excess is taxed on a sliding scale from 18% to 40%. Here’s a simplified look at how the estate tax brackets work:
| Tax Rate | Taxable Amount | Tax Owed |
| 18% | $0-$10,000 | 18% of taxable income |
| 20% | $10,001-$20,000 | $1,800 plus 20% of amount over $10,000 |
| 22% | $20,001-$40,000 | $3,800 plus 22% of amount over $20,000 |
| 24% | $40,001-$60,000 | $8,200 plus 24% of amount over $40,000 |
| 26% | $60,001-$80,000 | $13,000 plus 26% of amount over $60,000 |
| 28% | $80,001-$100,000 | $18,200 plus 28% of amount over $80,000 |
| 30% | $100,001-$150,000 | $23,800 plus 30% of amount over $100,000 |
| 32% | $150,001-$250,000 | $38,800 plus 32% of amount over $150,000 |
| 34% | $250,001-$500,000 | $70,800 plus 34% of amount over $250,000 |
| 37% | $500,001-$750,000 | $155,800 plus 37% of amount over $500,000 |
| 39% | $750,001-$1,000,000 | $248,300 plus 39% of amount over $750,000 |
| 40% | $1,000,001 and up | $345,800 plus 40% of amount over $1,000,000 |
Federal estate taxes are typically paid out of the estate itself before any distributions are made to heirs. The executor of the estate is responsible for filing the return and ensuring any taxes owed are paid.
State Estate Tax Exemptions
Some states impose their own estate taxes. In general, your estate tax bill is subtracted from the value of your taxable estate before you calculate what you might owe the IRS. There are a handful of states that impose an estate tax. These are Connecticut, District of Columbia, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, and Washington. Here are their individual exemption amounts.
| State | 2025 Exemption |
| Connecticut | $13.99 million |
| District of Columbia | $4.873 million |
| Hawaii | $5.49 million |
| Illinois | $4 million |
| Maine | $7 million |
| Maryland | $5 million |
| Massachusetts | $2 million |
| Minnesota | $3 million |
| New York | $7.16 million |
| Oregon | $1 million |
| Rhode Island | $1.8 million |
| Vermont | $5 million |
| Washington | $2.19 million |
Your estate assets pay any federal and state taxes before they are distributed to beneficiaries. Typically, the executor of the estate is responsible for making tax payments. They also confirm there are no other liabilities due, and then distribute the remaining assets.
What Are Inheritance Taxes?
Inheritance taxes are state taxes levied on a deceased individual’s assets. The beneficiaries are usually responsible for paying these taxes. The amount owed is based on the total value of the estate. The assets can be anything from money to stocks to property. Currently, six states impose an inheritance tax:
| State | Tax Rates |
| Kentucky | 0%-16% |
| Maryland | 0%-10% |
| Nebraska | 0%-15% |
| New Jersey | 0%-16% |
| Pennsylvania | 0%-15% |
Iowa has eliminated its inheritance tax for deaths as of January 1, 2025. Your tax rate is typically based on your relationship to the decedent. Surviving spouses are almost always exempt from this tax. In some states, so are sons, daughters, and parents of the deceased. Usually, you would pay a higher rate if you had no familial relationship with the decedent.
Inheritance taxes come into effect after the estate is divided and distributed to the appropriate beneficiaries. Typically, each state will have their own exemption rules. In other words, the assets are taxed after they reach a certain value. For example, if your state imposes a 5% tax on inheritances larger than $3 million, and you inherited $5 million in assets, you will pay tax on $2 million.
How Can I Reduce Estate and Inheritance Taxes?
Although federal estate taxes now affect only a small percentage of estates, planning still matters, especially in high-tax states or for individuals with large estates. Here are some common ways to reduce your estate’s tax burden:
- Annual Gifts: Gift up to $18,000 per person per year (2025) without affecting your estate exclusion.
- Direct Payments for Education or Medical Expenses: Payments made directly to schools or hospitals are not taxable gifts.
- Irrevocable Life Insurance Trusts (ILITs): These remove life insurance from your taxable estate.
- Charitable Giving: Donations to qualified charities reduce the taxable value of your estate.
- Use Portability: Make sure your executor files IRS Form 706 to preserve your spouse’s unused exemption.
For state-level inheritance and estate taxes, tailored planning may involve changing residency, adjusting how assets are titled, or using trusts to control distributions.
Tax Help with Estates
We know taxes are the furthest thing from your mind when grieving the death of a loved one. Alternatively, preparing a will should not have to result in worry. If you are planning to leave behind assets for your loved ones after death, you can reduce estate taxes. For example, you can pay for educational or medical expenses from your estate. These payments will be exempt from taxes if the funds go directly to the provider. Also, setting up an irrevocable trust or life insurance trust (ILIT) can help ensure that assets are not used to pay taxes. A team of expert tax professionals can help. Optima Tax Relief is the nation’s leading tax resolution firm with over a decade of experience helping taxpayers with tough tax situations.
If You Need Tax Help, Contact Us Today for a Free Consultation