IRC 2001: Imposition and Rate of the Federal Estate Tax

Internal Revenue Code (IRC) Section 2001 establishes the federal estate tax, a levy on the transfer of a person’s assets after death. This tax is not determined by what an individual heir receives but is calculated based on the total value of the decedent’s property. The law imposes a tax on the right to transfer significant wealth. This framework applies to the estates of all U.S. citizens or residents and is a distinct calculation from any state-level taxes. The process involves valuing a decedent’s assets, subtracting specific allowable deductions, and then applying a progressive tax rate to the resulting amount.

The Unified Gift and Estate Tax System

The Tax Reform Act of 1976 created a single, unified system for the estate and gift taxes. Before this change, the two taxes operated independently, which sometimes allowed individuals to reduce their potential estate tax by giving away assets during their lifetime at lower gift tax rates. The unified system addresses this by treating lifetime gifts and transfers at death as a cumulative series of transfers.

Imagine a single bucket that holds all of a person’s taxable transfers; every significant gift partially fills this bucket, and the remaining assets at death fill it further. The total amount is then subject to one unified tax schedule, ensuring tax consequences are similar regardless of when wealth is transferred.

Establishing the Estate Tax Base

Before the estate tax can be calculated, the total value subject to the tax, known as the tax base, must be established. This involves a two-part process that determines the value of the assets at death and then incorporates certain gifts made during life.

The Taxable Estate

The first component is the “Taxable Estate.” Its calculation begins with the “Gross Estate,” which, under IRC Section 2033, is the fair market value of all property a person has an interest in at the time of death. This includes cash, securities, real estate, business interests, and proceeds from life insurance policies. From the Gross Estate, several deductions are allowed to arrive at the Taxable Estate. These deductions include:

• Funeral expenses
• Estate administration costs, such as attorney and executor fees
• The decedent’s outstanding debts
• The marital deduction for property passing to a surviving spouse under IRC Section 2056
• The charitable deduction for bequests made to qualified charities

Adjusted Taxable Gifts

The second component of the tax base is “Adjusted Taxable Gifts.” This is the total of all taxable gifts made by the individual after December 31, 1976, that are not already included in the gross estate. A “taxable gift” is the portion of a gift that exceeds the annual gift tax exclusion for the year it was made. Under IRC Section 2503, individuals can give up to a certain amount each year tax-free; for 2025, this amount is $19,000. If a person gives someone $50,000, the amount exceeding the annual exclusion becomes a taxable gift.

How the Estate Tax is Calculated

The calculation of the federal estate tax is a multi-step process. The first step is to determine the total tax base by adding the value of the Taxable Estate to the amount of the Adjusted Taxable Gifts. For instance, if an individual has a Taxable Estate of $15 million and made Adjusted Taxable Gifts of $1 million, the tax base would be $16 million.

Next, a “Tentative Tax” is computed on this total tax base using progressive tax rates that start at 18% and increase to a maximum of 40% for amounts over $1 million. Following the tentative tax calculation, a credit is subtracted for the gift taxes that were paid or would have been payable on the post-1976 gifts. The final step is the subtraction of the applicable credit amount, which is derived from the basic exclusion amount and eliminates the tax for most estates.

The Basic Exclusion Amount and Portability

The basic exclusion amount is a significant element in modern estate tax planning, functioning as a credit that can offset the federal estate tax. This credit, along with a provision known as portability, determines whether an estate will actually owe any tax. These features shield the vast majority of estates from payment.

The Basic Exclusion Amount (Unified Credit)

The basic exclusion amount is a specific dollar figure set by law, adjusted annually for inflation, that each individual can transfer without incurring federal gift or estate tax. For 2025, the exclusion amount is $13.99 million per person. This is not a deduction from the value of the estate; instead, it translates directly into a dollar-for-dollar credit against the tentative tax. If the tentative tax calculated on an estate is less than the credit provided by the exclusion amount, no federal estate tax is due. Consequently, only estates with a total value exceeding this threshold will have a potential tax liability.

Portability (DSUE)

A provision known as “portability” allows a surviving spouse to use any unused portion of their deceased spouse’s exclusion, officially termed the Deceased Spousal Unused Exclusion (DSUE). For instance, if the first spouse to die in 2025 uses only $5 million of their $13.99 million exclusion, the remaining $8.99 million is “portable” and can be transferred to the surviving spouse. The surviving spouse can then add this DSUE amount to their own exclusion, sheltering a larger combined estate from tax.

To secure this benefit, the executor of the first-to-die spouse’s estate must file a federal estate tax return, Form 706, and make the portability election. This filing is necessary even if the estate is not large enough to owe any tax. The return is due nine months after the date of death, though extensions are available. For estates not otherwise required to file, a simplified procedure allows this election to be made up to five years after death. Failure to file a timely return and elect portability results in the forfeiture of the unused exclusion.