How to Calculate Estate Tax — Step by Step

The formula, in one paragraph

Estate tax has four steps. First, the net estate: the gross estate minus debts and expenses, charitable bequests and the marital deduction. Second, the exemption: in 2026 the first $15,000,000 of a net estate is exempt, less any prior taxable gifts already made during life. Third, the taxable estate: the net estate minus the remaining exemption, never below $0. Fourth, the tax: the graduated rate table from 18% to 40% applied to the taxable estate. The heirs keep the net estate minus the tax.

Step 1: Work out the net estate

Start with everything the estate owns, then subtract what it owes and gives away. At the example numbers the gross estate is $25,000,000, the debts are $500,000, the charitable bequests are $1,000,000 and the marital deduction is $5,000,000. The net estate is $25,000,000 minus $500,000 minus $1,000,000 minus $5,000,000, which is $18,500,000.00.

Step 2: Work out the remaining exemption

Subtract the prior taxable gifts already made during life from $15,000,000. At the example numbers the prior gifts are $0, so the remaining exemption is $15,000,000.00. With $2,000,000 of prior gifts it would be $13,000,000.00.

Step 3: Work out the taxable estate

Subtract the remaining exemption from the net estate. At the example numbers $18,500,000 minus $15,000,000 is $3,500,000.00. It can never go below $0.00.

Step 4: Work out the tax

Apply the graduated table to the taxable estate. The table runs from 18% to 40%, with a $345,800 base at $1,000,000. At the example numbers the taxable estate is $3,500,000, so the tax is $345,800 plus 40% of $2,500,000, which is $345,800 plus $1,000,000, which is $1,345,800.00. Only the part over $1,000,000 is taxed at 40%.

Step 5: Work out what the heirs keep

Subtract the tax from the net estate. At the example numbers the net estate is $18,500,000 and the tax is $1,345,800, so the heirs keep $18,500,000 minus $1,345,800, which is $17,154,200.00.

The same arithmetic at other estates

The same steps scale to any estate. On a $30,000,000 gross estate the net estate is $23,500,000.00, the taxable estate is $8,500,000.00 and the tax is $3,345,800.00, so the heirs keep $20,154,200.00. On a $16,000,000 gross estate the net estate is $9,500,000.00, the taxable estate is $0.00 and the tax is $0.00.

Working backwards from a target

The calculation also runs backwards. The first dollar of tax starts at a $21,500,000 gross estate, where the net estate is $15,000,000 exactly. A gross estate of $24,135,500 owes exactly $1,000,000 of tax, because its taxable estate is $2,635,500 and $345,800 plus 40% of $1,635,500 is $1,000,000. And an extra $3,500,000 of marital deduction, raising it to $8,500,000 in total, brings the net estate to $15,000,000 and the tax to $0.

When no tax is due at all

Most estates owe nothing, because the exemption covers them. A $5,000,000 estate owes $0.00. But remember the state tax: 12 states plus DC charge their own estate tax with much lower exemptions, so an estate that owes no federal tax can still owe state tax. Oregon exempts only $1,000,000 and Massachusetts only $2,000,000.

What NOT to do

Do not assume a big estate means a big tax bill: the exemption is what matters, not the size of one estate. Do not forget the prior gifts: a taxable gift you forgot about is the one that starts the tax.

That box is the whole formula.