The federal estate tax in the United States has seen significant changes since the year 2000, where the exemption level was set at $675,000. By 2025, individuals will be able to leave up to $13.99 million to their heirs without incurring any estate tax. Notably, a new legislation known as the One Big Beautiful Act, which was signed into law by President Donald Trump, will prevent the exemption level from reverting to the previously scheduled amount of over $7 million after this year. Instead, beginning in 2026, the exemption will increase to approximately $15 million per individual and will adjust annually for inflation thereafter.
For married couples, this exemption effectively doubles. The law allows the unused exemption of the deceased spouse to be transferred to the surviving spouse, allowing couples potentially to pass on up to $27.98 million tax-free this year and $30 million next year.
However, it’s essential to remember that the estate tax rates, which range from 18% to 40% based on the size of the taxable portion of the estate, remain unchanged. The current rate structure is considerably lower than the peak 55% rate that existed in 2001.
The increase in the exemption level is expected to further lower the already slight percentage of estates that are subject to the estate tax. In 2001, around 2.1% of deceased Americans left behind taxable estates; this number decreased to 0.07% by 2019. With the new exemption in place, this figure is projected to rise to only 0.2% in 2026 if the previous level had been reinstated.
Despite the reduction in taxable estates at the federal level, individuals should be mindful of state estate taxes. Twelve states, along with the District of Columbia, impose their estate taxes, and the exemption levels and tax rates differ from state to state. For instance, Massachusetts has a $2 million exemption level with rates that can range from 0.8% to 16%, while Washington allows exemptions up to $3 million, with rates reaching up to 35% for taxable portions of estates.
This legislation could provide financial relief for many families, as it allows them to preserve more wealth for future generations, potentially fostering economic stability and supporting future investments.