What Are Estate and Gift Taxes and How Do They Work?
The federal government collects the vast majority of its revenues by taxing individuals and businesses on their earnings. However, the government also has other sources of revenue. One of those — the estate and gift tax system — levies taxes on the transfer of assets at death. While those provisions of the tax code produce relatively lower revenue compared to other sources, they generate a significant amount of attention, and even controversy, in the context of the broader conversation about wealth and fairness in our tax system.
What Is the Federal Estate Tax and How Does It Work?
The estate tax, established in 1916, was initially enacted to address the increasing concentration of wealth. It only applies to assets bequeathed to heirs above a certain threshold or exemption amount. Transfers to spouses are fully exempt, and any unused exemption amounts can be transferred to the surviving spouse for future use.
For 2025, the lifetime estate tax exemption per person is $13.99 million, which means that a couple can transfer up to $28 million in value tax free. The overwhelming majority of estates in the United States fall under the limit. In 2026, that threshold is set to increase to $15 million for individuals — effectively $30 million for couples — and will be indexed for inflation thereafter. Transfers above the threshold are taxed at a flat 40 percent rate.
To illustrate how the estate tax works, consider these examples: An estate worth $10 million would have no estate tax liability, regardless of who the beneficiary is, because the value of the estate is below the estate tax threshold. On the other hand, a person leaving an estate with a value of $17 million could have two different tax outcomes depending on the beneficiary.
- If that estate were transferred to a spouse, there would be no tax liability.
- If there were no spouse or the estate was not transferred to the spouse at death, the estate would be taxed on the value above the $13.99 million threshold. In this case, $3.01 million would be subject to a 40 percent tax, resulting in a tax liability of $1.2 million.
Assets subject to the estate tax include real estate, financial investments, collectibles, furnishings, and other valuables. When an asset increases in value and the decedent has not sold it before death, the value of the asset is “stepped up” to reflect the current value at the time of transfer to the beneficiary. That means the beneficiary will never be required to pay taxes on the capital gains accrued during the decedent’s lifetime. That can happen generation after generation, resulting in a large amount of capital gains that have never been taxed. According to economists William G. Gale, Oliver Hall, and John Sabelhaus in "The Great Wealth Transfer," unrealized capital gains made up over a third of bequeathable wealth in 2021, with the wealthiest 1 percent of older households controlling approximately $11 trillion in unrealized gains — nearly half the nation's GDP.
What Is the Gift Tax?
The gift tax, which was enacted in 1932, prevents individuals from avoiding the estate tax by transferring assets before death. The annual gift exclusion allows a donor to transfer up to $19,000 ($38,000 for married couples) per recipient per year before owing any tax. Gifts between spouses are tax exempt. Gifts received are not taxable income to the recipient, instead any tax liability falls on the donor.
When gifts exceed $19,000 in a year, donors have two options. They can either pay the gift tax immediately at a rate of 40 percent, or defer the tax. If they choose deferral, their exception for the estate tax is decreased by the amount over the gift exemption threshold.
Generation Skipping Transfer Tax
Gifts to individuals two or more generations, or 37.5 years, younger than the donor are subject to a separate tax called the generation skipping transfer tax (GSTT). The GSTT ensures that estates cannot significantly reduce the ultimate estate and gift tax burden on an asset by transferring it to younger generations.
Like the estate tax, gifts to the younger generation are taxed at the estate tax flat rate of 40 percent and enjoy the same $13.99 million lifetime exclusion that applies to all estates. However, unlike the estate tax exemption, unused exclusions cannot be transferred to a spouse.
Trends in Federal Estate and Gift Taxes
Recent policy changes, including those adopted under the Tax Cuts and Jobs Act (TCJA) and extended under the One Big Beautiful Bill Act (OBBBA), have resulted in fewer estates paying taxes. The Internal Revenue Service (IRS) reported that in 2017, before the effective date of TCJA, over 12,711 estates filed tax returns of which 5,185 were taxable, accounting for 0.7 percent of all federal tax revenues. In 2019, after the enactment of TCJA, the IRS reported that only 6,409 estates filed tax returns of which 2,570 were taxable and accounted for just 0.5 percent of all tax revenues. Because the tax primarily affects very wealthy taxpayers, the top 10 percent of earners paid 90 percent of estate taxes in 2023, with 29 percent paid by the top 0.1 percent of earners.
Even before the TCJA, estate and gift taxes had been declining as a share of federal revenues, falling from an average of 2.0 percent in the 1970s to less than 0.6 percent in 2024. In 2024, the federal government collected $32 billion in such taxes.
The trends in estate and gift tax revenues are largely dependent on two factors: the tax rate and the filing threshold, both of which have varied greatly over the past two decades. Gradual increases to the filing threshold coupled with lower tax rates have resulted in reduced revenues from the estate tax. For example, from 2000 to 2009, the filing threshold increased from $0.7 million to $3.5 million while the tax rate declined from 55 percent to 45 percent. That resulted in a 19 percent decrease in estate and gift tax revenues. Since then, the estate tax rates and filing thresholds have been changed multiple times:
- In 2010, the estate tax was repealed entirely, leaving only gift taxes in effect that year.
- In 2011, estate taxes were re-established, and the top tax rate was set at 35 percent. The filing threshold was set at $5 million and included the lifetime gift exemption — formerly a separate threshold for assets transferred during one’s lifetime.
- In 2012, the top tax rate increased to 40 percent. In 2017, the TCJA doubled the filing threshold to $11.2 million for singles and $22.4 million for married couples and included an inflation adjustment for each year from 2018 through 2025.
- Under the One Big Beautiful Bill Act, the filing threshold will increase to $15 million in 2026 and continue to be adjusted for inflation each year.
State Taxation of Estates
Thirteen jurisdictions also impose state-level estate taxes, with rates and filing thresholds that are generally less than half of the federal levels. The rate is lowest in Connecticut and Maine at 12 percent on the value of estates above $13.99 and $7 million, respectively, and it is highest in Washington and Hawaii at 20 percent on the value of estates above $2.2 and $5.5 million, respectively. Estates with a value of less than $1 million are not subject to taxes in any jurisdiction.
Estate Tax Controversy
In debating the estate tax, significant discussion often focuses on its impact on small businesses and family farms and ranches. In some cases, those who inherit a business or farm cannot pay the estate tax without selling a portion of the operation. However, only 0.2 percent of operating farms are subject to the estate tax because the exemption threshold is so high.
Moreover, several estate tax provisions specifically benefit family businesses and farms, including installment payments over 14 years, special use valuations reducing estate value by up to $1.39 million, and conservation easements providing additional deductions up to $500,000. Critics argue these protections are insufficient to protect small businesses and farms, and these issues remain a prominent part of the debate on the estate tax.
Conclusion
There are ongoing debates about the design, fairness and impact of estate and gift taxes. High exemption threshold levels mean that only a fraction of American estates are affected by estate and gift taxes, and that this category is a relatively small source of federal revenues. Understanding how these taxes work is essential to the broader conversation about the United States and its fiscal trajectory.
Further Reading
Understanding the New Senior Deduction in the One Big Beautiful Bill Act
The senior deduction adds complexity to the tax code, and fewer than half of seniors will benefit from it.
10 of the Largest Tax Breaks Explained
Tax breaks totaled over $2.0 trillion in 2025. That’s more than the government spends on Social Security, defense, or Medicare and Medicaid.
8 Key Charts on Tax Breaks
The cost of tax breaks was greater than the size of the deficit in 2025.