Estate and Inheritance Taxes

Estate taxes are based on the net value of the assets held by someone who dies. The tax is paid by the estate. In contrast, an inheritance tax is paid by the heirs. The federal government only levies an estate tax. Some states also levy an estate tax, while only a handful have an inheritance tax.

The federal estate tax was enacted to raise revenues. It was also intended to reduce the concentration of wealth, thus increasing economic equality. In the absence of the estate tax, large amounts of capital income would escape taxation entirely. The same is true for inheritance taxes.

The estate tax is one of the most progressive elements of the federal tax system. Only the largest estates are subject to this tax. The tax does not apply to estates smaller than the exemption. In 2024, the exemption was $13.6 million.

The federal estate tax also exempts capital gains, or increases in an asset’s value, accrued before the owner's death from taxation.

As an alternative to the estate tax, policymakers could tax all inheritances as capital gains. Heirs would owe taxes on the amount by which assets appreciated over time.