Understanding how much money can you inherit without paying taxes on it has become increasingly important as federal exemption limits continue climbing. For 2025, the federal estate tax exclusion amount has increased to $13.99 million per individual, up from $13.61 million in 2024, marking the highest exemption level in U.S. history.
The massive federal exemption means most Americans will never face inheritance taxes. Married couples can shield up to $27.98 million from federal estate and gift taxes, protecting the vast majority of family wealth transfers from federal taxation.
Federal Estate Tax Exemption Breakdown
1. Lifetime Estate and Gift Tax Exemption
- Single Individuals:
Each individual has a lifetime exemption amount of $13,990,000 in 2025. This means that over their lifetime, a person can transfer up to this amount through gifts or at death without incurring federal estate or gift taxes. - Married Couples:
Married couples can effectively combine their exemptions, allowing them a total combined exemption of $27,980,000. This is because each spouse has an individual exemption that can be “ported” or transferred to the surviving spouse, effectively doubling the exempt amount.
2. Annual Gift Tax Exclusion
- In 2025, the annual gift tax exclusion increases to $19,000 per recipient. This means:
- You can give up to $19,000 to any number of individuals in a calendar year without needing to file a gift tax return and without reducing your lifetime exemption.
- This is the highest annual gift tax exclusion to date, up from $18,000 in 2024.
- For example, a single person could gift $19,000 to each of their children, grandchildren, or any other recipients without any tax consequence or reporting requirement.
- For married couples, each spouse has this exclusion individually, so together they could gift up to $38,000 per recipient per year without affecting their lifetime exemption.
3. How These Exemptions Work Together
- Gifts over the annual exclusion amount (over $19,000 to one recipient in 2025) must be reported to the IRS on a gift tax return (Form 709).
- However, these larger gifts do not necessarily result in taxes owed immediately. Instead, they count against the lifetime exemption of $13.99 million per person.
- When someone passes away, the total value of their estate (including lifetime taxable gifts) is considered. If it exceeds the exemption amount, estate tax may be owed on the excess.
4. Other Important Points
- These exemption amounts are indexed for inflation and can change each year.
- If the taxes on estates or gifts are owed, the federal estate tax rate can be significant, historically reaching up to 40%.
- States may have their own estate or inheritance taxes, which have separate rules and exemption amounts.
- Strategies such as gift splitting (between spouses), trusts, and charitable giving can help minimize gift or estate taxes.
Summary Table for 2025
| Category | Amount | Notes |
|---|---|---|
| Single Lifetime Exemption | $13,990,000 | Exemption for estate + gift tax combined |
| Married Couples Exemption | $27,980,000 | Combined exemption via portability of spouse |
| Annual Gift Tax Exclusion | $19,000 per recipient | Tax-free gifts to each person per year |
State-Level Inheritance Considerations
1. State Estate and Inheritance Taxes Overview
While federal estate and gift tax exemptions are quite high ($13.99 million per individual in 2025), many states impose their own estate or inheritance taxes with much lower exemption thresholds, which can significantly affect inheritance planning.
- Some states have estate taxes, which are similar to the federal estate tax but with a much lower exemption amount.
- Other states impose an inheritance tax, which is a tax on the beneficiaries who receive the inheritance, and often varies based on their relationship to the decedent.
Read Also-When Does No Tax on Overtime Start?
2. Maryland Example: Proposed Changes
- Maryland has been at the forefront of notable state estate tax policy changes.
- In 2025, the Maryland governor proposed reducing the estate tax exemption from the current $5 million to $2 million per individual.
- At the same time, Maryland proposed repealing its inheritance tax.
- If enacted, this would mean estates valued over $2 million could owe state estate tax, a significant reduction compared to the federal exemption, thus impacting many more estates at the state level.
3. Other State Exemptions and Tax Rates (examples)
- Washington State: Estate tax exemption is $2,193,000 with tax rates between 10-20%, with recent increases planned to $3 million for deaths occurring after July 2025.
- Massachusetts: Estate tax exemption has been reduced to $2,000,000.
- New York: Estate tax exemption is $7,160,000 but with a complex “cliff” rule for estates exceeding 105% of this amount.
- States like Connecticut, Illinois, Hawaii, Minnesota, and others have estate tax exemptions ranging from about $2 million to $5.5 million, with tax rates commonly between 8-20%.
- Several states also impose inheritance taxes with varying rates and thresholds depending on the heir’s relationship to the deceased.
4. Step-Up in Basis Rule
- The step-up in basis rule provides significant tax relief by allowing inherited assets to have their cost basis “stepped up” to their fair market value at the time of the decedent’s death.
- This can reduce capital gains taxes significantly when the heir sells the asset.
- If the estate is below the federal exemption amount (i.e., no federal estate tax due), it may be advantageous to retain the asset to benefit from the step-up in basis rather than gifting it before death.
- This rule is an important consideration in estate and inheritance planning because it can affect whether it is more tax-efficient to gift assets during life or to inherit them.
5. Planning Implications
- Because state estate or inheritance tax exemptions are much lower than federal exemptions, estate planning strategies should include consideration of state-level taxes.
- States differ not only in exemption amounts but also in tax rates and rules regarding taxable transfers.
- Regularly reviewing estate plans is crucial, especially with changing state laws such as Maryland’s proposed changes or Washington’s increasing exemption and tax rates.
- Consider strategies such as trusts, gifting within exclusions, and timing of transfers to minimize estate and inheritance tax liabilities.
Summary Table: Selected State Estate and Inheritance Tax Exemptions for 2025
| State | Estate Tax Exemption | Inheritance Tax | Tax Rate Range | Notes |
|---|---|---|---|---|
| Maryland | Proposed $2,000,000* | Yes | Estate: 0.8-16%, Inheritance: 10% | Proposed reduction to $2M exemption in July 2025 |
| Washington | $2,193,000 (raised to $3M mid-2025) | No | 10-35% (progressive) | Filing threshold = exemption |
| Massachusetts | $2,000,000 | No | 0.8-16% | Recent legislation 2023 |
| New York | $7,160,000 | No | 3.06-16% | “Cliff” rule above 105% exemptions |
| Illinois | $4,000,000 | No | 0.8-16% | |
| Kentucky | No estate tax | Yes | 4-16% | Applies to most heirs except close family |
| Pennsylvania | No estate tax | Yes | 4.5% to 15% | Applies to non-spouse/parent inheritors |
* Maryland’s 2025 proposal subject to legislation.
State estate and inheritance taxes often cut into estates that are well below the federal exemption, meaning planning must carefully consider the specific state law environment. The step-up in basis rule remains a valuable tool to reduce capital gains taxes on inherited assets, which might influence decisions on asset retention versus gifting.
Recent Legislative Changes
1. Trump Tax Megabill Estate Tax Exemption Increase
- The newly proposed Trump tax megabill includes a significant increase in estate tax exemption amounts:
- $15 million exemption for single filers.
- $30 million exemption for married couples filing jointly.
- This would mark a substantial increase from the current 2025 exemption levels of $13.99 million (single) and $27.98 million (married couples).
- The increase aims to reduce the number of estates subject to the federal estate tax even further, limiting federal tax exposure to only the wealthiest estates.
- If enacted, fewer estates would owe federal estate taxes, with many estates currently close to but under the $13.99 million threshold gaining additional protection.
- This would potentially shift the focus of estate planning toward maximizing these larger exemptions and structuring transfers to capitalize on the higher thresholds.
2. Background: Tax Cuts and Jobs Act of 2017
- The current high exemption amounts originated from the Tax Cuts and Jobs Act (TCJA) of 2017, which doubled the estate and gift tax exemptions from about $5.49 million per person to approximately $11 million upon enactment.
- These amounts are indexed for inflation, which explains the rise to $13.99 million in 2025.
- The TCJA introduced these temporary increases to remain in effect through 2025.
- Without legislative action, the exemptions are scheduled to revert to pre-2018 levels (roughly $5-6 million per individual, adjusted for inflation) beginning in 2026.
- This sunset provision means current estate planning benefits are temporary, and the potential for significantly higher federal estate taxes looms unless Congress steps in.
3. Implications of the Current Legislative Environment
- Given the potential drop in exemption amounts after 2025, estate planning has become a heightened priority for those with estates near or above the current thresholds.
- Many advisors encourage making use of the higher current exemptions by making lifetime gifts or establishing trusts before the reversion in 2026.
- The proposed Trump tax megabill’s further increase to $15 million/$30 million (single/married) would extend and enhance these benefits.
- However, the legislative process for this bill is ongoing, and the final details and enactment timeline remain uncertain.
4. Planning Considerations
- Individuals and couples should consider strategies that lock in current high exemptions (e.g., gifting, establishing family trusts).
- Monitor legislative changes closely, as any action to increase exemptions (as in the megabill) or to let them revert will directly impact tax liability.
- Given the looming sunset of the 2017 TCJA provisions, those who act sooner could optimize estate tax savings.
- The interplay between state-level estate/inheritance taxes and federal exemptions should also be considered in planning.
Summary Table: Federal Estate Tax Exemption Comparison
| Year/Legislation | Single Exemption | Married Joint Exemption | Notes |
|---|---|---|---|
| Pre-2018 (pre-TCJA) | ~ $5-6 million | ~ $11-12 million | Former exemption levels before TCJA |
| Post-TCJA (2018-2025) | $11 – $13.99 million | ~$22 – $27.98 million | Doubled exemptions indexed for inflation |
| Proposed Trump Megabill | $15 million | $30 million | Substantial proposed increase pending legislative approval |
| 2026 Planned Reversion | ~$6 million (inflation-adjusted) | ~$12 million (inflation-adjusted) | Reversion to pre-TCJA levels if no Congressional intervention |
The current high exemption amounts and the proposed megabill increases represent valuable planning opportunities. However, the uncertainty surrounding the scheduled 2026 reversion means estate planning must remain flexible to accommodate both higher or lower exemption possibilities in the near future.
Tax Rates for Larger Estates
1. Federal Estate Tax Rates on Larger Estates
- Estates with a value exceeding the exemption amount are subject to federal estate tax on the amount above the exemption threshold.
- The federal estate tax rate is generally up to 40% on the taxable portion of the estate.
- Specifically, once an estate’s value exceeds the exemption (e.g., $13.99 million per person in 2025), the excess amount is taxed at this top rate.
- The 40% rate applies to estates exceeding the exemption by as little as $1 over the threshold, so proper planning to avoid breaching the exemption is critical.
2. Graduated Tax Rates and Thresholds
- The estate tax is structured with graduated tax brackets, meaning tax rates increase as the taxable estate value rises above the exemption.
- For example, in 2025, the rates start lower for amounts just over the exemption but quickly rise:
- 18% on the first $10,000 over the exemption.
- Rates increase gradually in increments until reaching 40% on amounts exceeding $1 million above the exemption.
- This progressive structure ensures smaller amounts over the exemption are taxed at lower rates, but significant excesses face the highest rates.
3. Impact of the High 40% Estate Tax Rate
- Because the 40% tax rate is substantial, avoiding or minimizing the taxable estate portion is a major focus for estate planning.
- Large estates approaching the exemption face significant financial risk if planning is not done to reduce taxable value.
- Techniques such as:
- Strategic lifetime gifting,
- Establishing trusts,
- Valuation discounts,
- Insurance planning,
- Charitable donations,
are commonly used to reduce taxable estate value and mitigate estate tax liability.
4. State-Level Estate Tax Rates
- Several states also levy estate or inheritance taxes with their own rates, often compounding the total tax burden.
- State rates can be as high as 16% or more, applied on much lower exemption thresholds.
- Planning must consider both federal and state tax implications to optimize overall tax efficiency.
5. Importance of Professional Estate Planning
- Proper planning can significantly reduce the estate tax bill or eliminate it entirely for estates near exemption limits.
- For ultra-wealthy families, minimizing the portion of the estate subject to the 40% rate can preserve substantial wealth for heirs.
- Regularly updating estate plans to reflect changing exemption amounts and tax laws is essential.
Summary Table: Federal Estate Tax Rates for 2025
| Taxable Estate Amount Over Exemption | Marginal Tax Rate (%) |
|---|---|
| $0 to $10,000 over exemption | 18% |
| $10,001 to $20,000 | 20% |
| Gradual increase in 2% increments | |
| $1 million and above over exemption | 40% |
The 40% tax rate on estates exceeding exemption by more than $1 million highlights why estate planning is critical to shield wealth from large tax liabilities. Leveraging exemptions, valuations, and gifting strategies can make a major difference in total estate tax owed.
Planning Opportunities Through 2025
The generous 2025 exemptions create significant planning opportunities. Individuals taking advantage of the increased gift tax exclusion amount in effect from 2018 to 2025 will not be adversely impacted after 2025 when the exclusion amount is scheduled to drop to pre-2018 levels.
Families should consider accelerating wealth transfers while current exemption levels remain high. The combination of high lifetime exemptions and annual gift exclusions allows substantial tax-free wealth transfers.
Understanding how much money can you inherit without paying taxes on it requires analyzing both federal and state regulations. With federal exemptions at historic highs, most inheritances remain tax-free, but wealthy families must navigate complex rules and potential future changes.
The current tax environment provides unprecedented opportunities for wealth preservation across generations. Families approaching exemption thresholds should consult estate planning professionals to maximize these benefits while they remain available.