How the TCJA Affects the Federal Estate Tax

The federal estate tax is a tax on the transfer of a person’s assets to their heirs after death. It is calculated based on the value of the decedent’s “gross estate,” which includes all property owned at the time of death. In 2017, the Tax Cuts and Jobs Act (TCJA) was signed into law, introducing modifications to the U.S. tax code. Among its provisions, the TCJA altered federal estate taxation by changing the amount of assets an individual can pass to heirs without incurring the tax.

The Federal Estate Tax Exemption Increase

The primary change the TCJA made to the federal estate tax was the increase in the basic exclusion amount. The TCJA doubled this base amount from $5 million to $10 million, which is then adjusted annually for inflation. This modification meant that far fewer estates became subject to the federal tax, which carries a top rate of 40%. For 2025, the inflation-adjusted federal estate tax exemption is $13.99 million per individual, and for a married couple, this combines to a total exemption of $27.98 million. The value of an estate exceeding this exemption amount is what becomes subject to the 40% tax rate.

A feature of the federal estate tax system is “portability.” Portability allows a surviving spouse to use any of their deceased spouse’s unused exclusion amount, known as the Deceased Spousal Unused Exclusion (DSUE). To secure this benefit, the executor of the deceased spouse’s estate must file a federal estate tax return (Form 706) and make the portability election, even if no tax is owed. This action preserves the DSUE amount for the surviving spouse to add to their own exemption, sheltering more assets from future estate tax.

Unified Gift and Estate Tax Framework

The United States operates under a unified gift and estate tax system, meaning the lifetime gift tax exemption and the estate tax exemption are linked. They are not two separate exemptions but rather one combined amount that can be used during life or at death. The TCJA’s increase to the estate tax exemption also applied to the lifetime gift tax exemption. This structure prevents individuals from avoiding the estate tax by simply giving away all their assets before they die.

When an individual makes a taxable gift—a gift exceeding the annual limit—they must file a gift tax return (Form 709). The value of that taxable gift then reduces the lifetime exemption amount available to their estate upon death. For example, if an individual makes a taxable gift of $3 million during their lifetime, their remaining estate tax exemption would be reduced by that amount.

The lifetime exemption is different from the annual gift tax exclusion. For 2025, an individual can give up to $19,000 to any number of individuals without gift tax consequences. These annual exclusion gifts do not reduce the lifetime gift and estate tax exemption. A married couple can combine their annual exclusions to give up to $38,000 per recipient. This tool allows for wealth transfer over time without impacting the larger unified credit.

The Sunset Provision and Anti-Clawback Rule

A characteristic of the TCJA’s changes to the individual tax code is their temporary nature. The provisions, including the doubled estate and gift tax exemption, are scheduled to “sunset,” or expire, on December 31, 2025. If Congress does not act to extend the legislation, the exemption amount will revert to its pre-TCJA level of $5 million, adjusted for inflation, which is estimated to be around $7 million in 2026. This pending change is a planning consideration for individuals with estates valued near this lower projected threshold.

The potential for the exemption to decrease created uncertainty about large gifts made during the high-exemption years. A concern arose that if an individual made a large gift, for instance $8 million, while the exemption was high, and then died after the exemption reverted to a lower amount, their estate might be penalized. The fear was that the IRS would “claw back” the difference, subjecting the previously tax-free portion of the gift to estate tax.

To address this issue, the Treasury Department and the IRS issued final regulations, often referred to as the “anti-clawback” rule. These regulations provide that individuals who take advantage of the increased gift tax exemption during the 2018-2025 period will not be adversely impacted if the exemption is lower at the time of their death. The rule allows the estate to calculate its tax credit using the higher exemption amount under which the gifts were made, preventing the clawback of taxes on those lifetime transfers.

State-Level Estate and Inheritance Tax Considerations

The Tax Cuts and Jobs Act was a federal law and did not directly alter any state-level tax systems. While the federal changes have meant fewer estates owe federal tax, a number of states continue to impose their own separate estate or inheritance taxes. An estate exempt from federal tax may still face a state tax liability, as the exemption amounts at the state level are often significantly lower than the federal threshold.

Several states impose an estate tax, which is a tax paid directly by the decedent’s estate before assets are distributed to heirs. The states with their own estate taxes have exemptions that are far below the federal level, sometimes as low as $1 million.

A smaller number of states levy an inheritance tax. Unlike an estate tax, an inheritance tax is paid by the beneficiaries or heirs who receive the property. The tax rate for an inheritance tax often depends on the relationship of the heir to the decedent. Close relatives like spouses and children pay a lower rate or may be completely exempt, while more distant relatives or unrelated beneficiaries pay a higher rate.