Specialized Returns for Individuals · Estate tax

Gross estate, taxable estate (calculations and payments), unified credit, life insurance, and filing requirements

The estate tax computation is misunderstood in a specific and consequential way. People describe the exclusion as an amount subtracted from the estate, and lifetime gifts as something that eats into it. Neither is how the statute works. Lifetime gifts are added to the taxable estate to build the base; the tax is computed on that whole base at the unified rates; and the exclusion arrives at the end as a credit, worth the tax on the exclusion amount and nothing more. Getting this order wrong produces answers that are close enough to look right and are not.

The rule

The gross estate is everything. the value at the time of death of all property, real or personal, tangible or intangible, wherever situated, to the extent of the decedent's interest in it (IRC §§ 2031(a), 2033)^TY2026Verified 2026-08-20IRC §§ 2031 and 2033, read at law.cornell.edu/uscode/text/26/2031 and /2033 The inclusion sections that follow — retained interests, powers, jointly held property, annuities, insurance — add things that are not obviously the decedent’s at death; § 2033 covers everything that plainly is.

The taxable estate is what is left after deductions. the gross estate less the deductions allowed by part IV — funeral and administration expenses, claims against the estate and unpaid mortgages under IRC § 2053, losses under § 2054, charitable transfers under § 2055 and the marital deduction under § 2056 (IRC §§ 2051, 2053(a))^TY2026Verified 2026-08-20IRC §§ 2051 and 2053, read at law.cornell.edu/uscode/text/26/2051 and /2053

Then the computation. a tentative tax on the sum of the taxable estate and adjusted taxable gifts, reduced by the gift tax that would have been payable on post-1976 gifts under current rates — so lifetime gifts enlarge the base rather than reducing the exclusion arithmetic (IRC § 2001(b))^TY2026Verified 2026-08-20IRC § 2001(b), read at law.cornell.edu/uscode/text/26/2001 The rate schedule is nominally graduated but functionally flat at the top: 40 percent of the excess over $1,000,000, on top of $345,800 — the top bracket of the IRC § 2001(c) unified rate schedule, which every estate large enough to owe tax is entirely inside^TY2026Verified 2026-08-20IRC § 2001(c), read at law.cornell.edu/uscode/text/26/2001

The credit, not an exclusion. the tentative tax that IRC § 2001(c) would produce on the applicable exclusion amount — a credit against tax, not a deduction from the estate, and the reason the exclusion is worth exactly the tax on it and no more (IRC § 2010(c)(1))^TY2026Verified 2026-08-20IRC § 2010(c), read at law.cornell.edu/uscode/text/26/2010 And the basic exclusion amount plus, for a surviving spouse, the deceased spousal unused exclusion amount (IRC § 2010(c)(2))^TY2026Verified 2026-08-20IRC § 2010(c)(2), read at law.cornell.edu/uscode/text/26/2010 For 2026 the basic exclusion amount is $15,000,000 for a decedent dying in calendar year 2026 — the IRC § 2010(c)(3)(A) basic exclusion amount as raised by Pub. L. 119-21 § 70106, indexed from calendar year 2026 and rounded to the nearest $10,000 under § 2010(c)(3)(B)^TY2026Verified 2026-08-19IRC § 2010(c)(3) read at law.cornell.edu/uscode/text/26/2010 and Rev. Proc. 2025-32 § 2.14 read at irs.gov/pub/irs-drop/rp-25-32.pdf

Valuation may be moved once. an irrevocable election to value everything six months after death, or at the date of disposition for property disposed of within those six months — available only if it decreases both the gross estate and the sum of the estate and generation-skipping taxes after credits (IRC § 2032(a), (c), (d))^TY2026Verified 2026-08-20IRC § 2032, read at law.cornell.edu/uscode/text/26/2032 Both conditions must hold, which is why the election is unavailable to an estate that owes no tax — there is nothing for it to decrease.

Two things reach back. property transferred, or a power relinquished, within the 3-year period ending at death is pulled back into the gross estate where it would have been included under IRC § 2036, 2037, 2038 or 2042 had the interest or power been retained (IRC § 2035(a))^TY2026Verified 2026-08-20IRC § 2035, read at law.cornell.edu/uscode/text/26/2035 And insurance on the decedent's life is in the gross estate to the extent receivable by the executor, and to the extent receivable by anyone else where the decedent possessed any incident of ownership at death, exercisable alone or with another (IRC § 2042)^TY2026Verified 2026-08-20IRC § 2042, read at law.cornell.edu/uscode/text/26/2042

Filing and payment. a return is required where the gross estate of a citizen or resident exceeds the basic exclusion amount in effect for the calendar year of death — $60,000 of United States situs property for a nonresident who is not a citizen (IRC § 6018(a))^TY2026Verified 2026-08-20IRC § 6018(a), read at law.cornell.edu/uscode/text/26/6018 9 months after the date of death (IRC § 6075(a))^TY2026Verified 2026-08-20IRC § 6075(a), read at law.cornell.edu/uscode/text/26/6075 where an interest in a closely held business exceeds 35 percent of the adjusted gross estate, the executor may elect to pay the attributable share of the tax in up to 10 equal installments (IRC § 6166(a))^TY2026Verified 2026-08-20IRC § 6166(a), read at law.cornell.edu/uscode/text/26/6166

Current figures

How it works in practice

The order of operations is the whole topic, and it runs in five steps.

One: value the gross estate. Everything the decedent owned at fair market value at death, plus the statutory add-backs. Fair market value is not book value, not insured value and not what the family agrees among themselves.

Two: subtract the deductions. Funeral and administration expenses, claims, mortgages, casualty losses during administration, charitable transfers, and the marital deduction. That produces the taxable estate.

Three: add adjusted taxable gifts. Post-1976 taxable gifts — gifts after the annual exclusion, not gross gifts — that are not already in the gross estate. This is the step people replace with “reduce the exclusion,” and the substitution is what goes wrong.

Four: compute the tentative tax on the total and subtract the gift tax that would have been payable. The subtraction prevents the same gifts being taxed twice, and it is computed at current rates under § 2001(g), not at the rates in force when the gifts were made.

Five: subtract the applicable credit. The credit is the tax on the applicable exclusion amount (IRC § 2010(c)(1)). It is not a dollar-for-dollar reduction of the estate.

Steps three to five give the same answer as the shortcut “estate plus gifts less exclusion, taxed at 40 percent” only because the top bracket is flat and every taxable estate is inside it. The shortcut breaks the moment a question involves a small estate, a state-level computation, or an exclusion that has already been partly consumed.

On payment. The tax is due when the return is due — nine months (IRC § 6075(a)) — and an extension of time to file is not an extension of time to pay. The § 6166 election is the main relief where the estate is illiquid, and it is worth checking early, because the 35 percent test is measured against the adjusted gross estate and can be affected by how expenses are claimed.

On filing when no tax is due. An estate below the threshold need not file, but a surviving spouse who wants portability must have a timely return filed by the first estate — see 1.6.1.c. This is the most common expensive omission in small estates, and it is a decision made by an executor who has been correctly told no tax is owed.

How this has changed

The number that governs this topic has moved more than any other figure on the site. The regime it replaced was $5,000,000 indexed, doubled to $10,000,000 indexed for decedents dying after 2017 and before 2026 by a temporary subparagraph that was to lapse — Pub. L. 119-21 § 70106(a) substituted $15,000,000 for $5,000,000, struck the temporary subparagraph and re-based the indexing on calendar year 2025^TY2026Verified 2026-08-20IRC § 2010(c)(3) and its 2017 and 2025 amendment notes, read at law.cornell.edu/uscode/text/26/2010 So the exclusion is now $15,000,000 for a decedent dying in calendar year 2026 — the IRC § 2010(c)(3)(A) basic exclusion amount as raised by Pub. L. 119-21 § 70106, indexed from calendar year 2026 and rounded to the nearest $10,000 under § 2010(c)(3)(B)^TY2026Verified 2026-08-19IRC § 2010(c)(3) read at law.cornell.edu/uscode/text/26/2010 and Rev. Proc. 2025-32 § 2.14 read at irs.gov/pub/irs-drop/rp-25-32.pdf, and it is a permanent figure indexed for decedents dying after 2026 rather than a temporary one with a cliff at the end (IRC § 2010(c)(3)).

That has changed the shape of the advice more than the arithmetic. Under the scheduled reversion, a great deal of planning was aimed at using exclusion before it disappeared. With the higher amount permanent, that urgency is gone for all but the largest estates, and the centre of gravity has moved to basis — because property in the gross estate takes a fair market value basis at death, while a lifetime gift carries the donor’s basis over. property acquired from a decedent takes a fair market value basis at death under IRC § 1014(a); property acquired by gift takes the donor's basis under § 1015(a), with a special rule using fair market value where that is lower and the sale produces a loss^TY2026Verified 2026-08-19IRC §§ 1014(a) and 1015(a), read at law.cornell.edu/uscode/text/26/1014 and /1015 For a family well under the exclusion, holding an appreciated asset until death is now usually better than giving it away, which is the opposite of the advice that prevailed when the exclusion was small.

The structure itself is unchanged. Sections 2001, 2031, 2032, 2033, 2035, 2042, 2051 and 2053 have not been amended in substance, and the unified rate schedule in § 2001(c) has stood since 2013.

Exam focus

Expect a computation. Build it in the statutory order — gross estate, deductions, taxable estate, plus adjusted taxable gifts, tentative tax, less gift tax payable, less applicable credit — because questions are written to punish the shortcut. In particular, watch for a question where the gifts are given gross and the annual exclusion has to be removed first.

Know that the credit is the tax on the exclusion amount and not the exclusion amount itself, know the nine-month due date, and know that the return threshold is the basic exclusion amount for the year of death, measured against the gross estate, before deductions.

The alternate valuation election is tested on its two conditions, and the § 2035 three-year rule is tested on its narrowness — it reaches §§ 2036, 2037, 2038 and 2042 property, not gifts generally.

Check yourself

1. An estate has a taxable estate of $4,000,000 and adjusted taxable gifts of $2,000,000. On what amount is the tentative tax computed?

Answer: $6,000,000. IRC § 2001(b)(1) computes the tentative tax on the sum of the taxable estate and adjusted taxable gifts. The gifts are added to the base; they do not reduce the exclusion.

2. A decedent’s gross estate is valued at more than the basic exclusion amount, but deductions bring the taxable estate below it. Is a return required?

Answer: Yes. IRC § 6018(a)(1) measures the filing requirement against the gross estate at death, not the taxable estate, so a return is required even though no tax may be due.

3. An executor wants to elect alternate valuation for an estate that will owe no tax either way. May he?

Answer: No. IRC § 2032(c) permits the election only where it decreases both the value of the gross estate and the sum of the estate and generation-skipping taxes after credits. Where no tax is payable, the second condition fails.

4. A decedent transferred a life insurance policy on her own life to her son 30 months before her death, retaining nothing. Are the proceeds in her gross estate?

Answer: Yes. IRC § 2035(a) includes property transferred within the 3-year period ending at death where it would have been included under § 2042 had the interest been retained. A transfer more than three years before death would have been outside the estate.

5. When is the estate tax return due, and when is the tax due?

Answer: Both 9 months after the date of death. IRC § 6075(a) sets the filing date, and the tax is payable on the same date; an extension of time to file does not extend the time to pay.