Estate and gift taxes are the smallest major source of federal revenue, raising just under $30 billion in 2025 and accounting for less than 1 percent of federal revenue.
Estate and gift taxes apply to intergenerational transfers. The estate tax falls on the value of an estate that exceeds an exemption of $15 million for single filers and $30 million for joint filers in 2026, indexed to inflation thereafter. The estate tax applies to gross property (everything that the decedent owned), including stocks, bonds, homes, business interests, art, and personal property. The value of the estate that exceeds the exemption faces a graduated set of rates that rises quickly to a top rate of 40 percent.
The estate tax encourages tax planning and avoidance and entails substantial compliance costs. To reduce avoidance, the gift tax applies to transfers made during a donor’s life. The gift tax exemption is integrated with the estate tax exemption. Gifts given during a donor’s life reduce the estate tax exemption. The gift tax has an additional exclusion each year ($19,000 for 2026, indexed to inflation), allowing donors to gift a certain amount each year without counting toward the exemption amount. Additionally, the generation-skipping tax applies an additional layer of tax on gifts made to recipients who are two or more generations younger than the donor to further prevent estate tax avoidance.
The presence of an estate tax encourages individuals to consume their wealth during their lifetime rather than invest it for future generations, thus marginally discouraging saving. The estate tax often represents a third or fourth layer of taxation on saving. An individual’s income can be taxed when it is earned, when it yields a profit at the business level, when it is returned to the individual via dividend or realized as a capital gain, and upon the individual’s death.
In part, to mitigate this double taxation, inheritors do not face income tax on inheritances they receive, and they also get to step-up the basis of assets they inherit to their fair market value so that assets are not subject to both the estate tax and the capital gains tax.
This chapter considers several options to change the estate tax, ranging from repeal to expansion, lowering rates to raising rates, and, more fundamentally, replacing the estate tax and reforming the treatment of capital gains taxes at death.
Note: Reform options presented within Options for Reforming America's Tax Code 3.0 illustrate the economic, revenue, and distributional tradeoffs of each tax option and are not necessarily endorsed or opposed by Tax Foundation.