US Estate & Inheritance Tax: The Complete Guide

For 2026, the federal estate tax exemption is $15 million per person (roughly $30 million for a married couple using portability), so the overwhelming majority of American families — Muslim or otherwise — will never owe a dollar of federal estate tax. But that is not the end of the story. Twelve states plus the District of Columbia run their own estate tax with exemptions as low as $1 million, five states impose a separate inheritance tax paid by the heir rather than the estate, and none of this changes how an estate is divided once Sharīʿah shares are applied — it only changes the size of the pool those shares are calculated from. This guide walks through the federal rules, the state-by-state landscape, portability, step-up in basis, gift tax, and exactly where each of these fits inside the sequence of farāʾiḍ distribution.

The Federal Estate Tax: Who Actually Pays It

The United States taxes the transfer of a large estate at death under the federal estate tax, but the exemption is set so high that it functions, in practice, as a tax on a very small number of very large estates. For deaths in 2026 the exemption is $15 million per individual. This figure was made permanent — and set at a higher level than prior law would have allowed — by the One Big Beautiful Bill Act, signed into law in July 2025, which locked in the $15 million threshold (indexed for inflation in future years) instead of letting the exemption fall back toward roughly half that amount as had been scheduled to happen at the end of 2025 under the expiring 2017 tax law. Above the exemption, the top federal estate tax rate is 40%.

Because the exemption is so large, the IRS estimates that only a tiny fraction of one percent of Americans who die in any given year owe any federal estate tax at all. If your total estate — real estate, investments, retirement accounts, business interests, and life insurance you owned — is comfortably under $15 million, your heirs receive their shares with no federal estate tax bill reducing the pot, regardless of how the estate is ultimately divided.

"For men there is a share of what parents and close relatives leave, and for women there is a share of what parents and close relatives leave — be it little or much — an obligatory share."

— Qur'an, Sūrat al-Nisāʾ 4:7

The unlimited marital deduction — and an Islamic nuance

US tax law grants an unlimited marital deduction: anything left outright to a surviving spouse who is a US citizen passes completely free of federal estate tax, with tax simply deferred until the second spouse's death. This sits awkwardly next to farāʾiḍ, which never gives the whole estate to a spouse — a widow takes 1/8 (or 1/4 with no descendant), a widower 1/4 (or 1/2 with no descendant), with the balance passing immediately to children, parents, and other heirs. A faraid-compliant estate therefore typically distributes wealth to several heirs at the first death rather than routing it all to the surviving spouse. That is not a tax problem in itself — if the estate is under the exemption, there is no tax owed either way — but it does mean the marital deduction is not the centerpiece of a faraid-compliant plan the way it is in conventional American estate planning. One detail worth flagging early: if the surviving spouse is not a US citizen, the unlimited marital deduction generally does not apply, and a Qualified Domestic Trust (QDOT) may be needed to defer tax on anything left to that spouse.

Portability and the DSUE

Because the exemption is per-person rather than per-couple, a mechanism called portability lets a surviving spouse use whatever exemption the first spouse to die did not use. This unused amount is called the Deceased Spousal Unused Exclusion, or DSUE. If a husband dies in 2026 having used none of his $15 million exemption, his widow can add that full $15 million to her own, giving her up to $30 million of combined shelter against the 40% federal rate when she later passes.

Portability is not automatic. The executor of the first spouse's estate must file IRS Form 706 — the United States Estate and Generation-Skipping Transfer Tax Return — and make the portability election on it, even if the estate is far below the threshold and owes no tax whatsoever. The return is due nine months after death, with a six-month extension available on request. Because so many modest estates owe no federal tax, families frequently skip filing Form 706 to save on legal and accounting fees — and in doing so, silently forfeit the DSUE forever. The IRS has, in recent guidance, extended a simplified late-portability-election procedure available for a number of years after death in many circumstances, which has rescued some families from this mistake, but it is not guaranteed and should never be relied on as a substitute for filing on time.

The States With Their Own Death Taxes

Federal rules are only half the picture. As of 2026, twelve states plus the District of Columbia impose their own estate tax, and five states impose a separate inheritance tax — a tax paid by the person who receives the money rather than by the estate itself. Maryland is the only state that levies both. Critically, most state exemption thresholds are far lower than the federal $15 million figure, which means an estate that owes nothing to the IRS can still trigger a real state-level tax bill.

States with an estate tax (2026)

Figures are illustrative approximations for 2026 gathered from public estate-planning summaries current as of this writing. Several of these exemptions (Massachusetts, Oregon, Minnesota, Vermont, Hawaii) are fixed dollar amounts set by state statute rather than inflation-indexed, while others adjust annually — always verify the exact current-year number for the specific state before relying on it, ideally directly from that state's department of revenue.

States with an inheritance tax

Five states tax the heir rather than the estate, with the rate typically depending on how closely related the recipient is to the deceased: Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. Spouses and, in most of these states, children are generally exempt or taxed at the lowest rate; more distant relatives and unrelated beneficiaries face higher rates. Nebraska, for example, taxes close relatives such as children at a low rate above a substantial exemption, but taxes more distant relatives (aunts, uncles, nieces, nephews) at a noticeably higher rate above a much smaller exemption, and unrelated beneficiaries at the highest rate with the smallest exemption of all.

Because state law is what actually governs whether a mid-sized estate owes any death tax at all, the state where the deceased was domiciled — and the state where any real property sits, regardless of domicile — must both be checked individually. Our inheritance tax calculator can help you estimate the federal and (where supported) state-level tax on a given estate size before you move to dividing the net amount by faraid.

Step-Up in Basis: The Quiet Tax Break for Heirs

Separate from the estate tax itself is a rule that benefits heirs of almost every estate, large or small: the step-up in basis, codified in IRC Section 1014. When an asset — a house, shares of stock, a business interest — passes to an heir at death, its cost basis is generally reset to its fair market value on the date of death, rather than what the original owner paid for it decades earlier. Any capital gain that built up during the deceased's lifetime is effectively wiped clean for tax purposes; the heir's basis starts fresh.

Concretely: a parent buys a home for $150,000 in the 1990s. By the time they pass away it is worth $750,000. If the parent had sold it themselves the day before death, they would have owed long-term capital gains tax on the $600,000 gain. Instead, the heir inherits with a basis stepped up to $750,000. If the heir sells shortly after for close to that value, there is little or no capital gains tax at all — the decades of appreciation simply disappear from the tax ledger. Married couples in one of the nine community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin) receive an even larger benefit: both halves of a jointly owned community-property asset get the step-up when the first spouse dies, not just the deceased spouse's half.

Step-up in basis does not apply to tax-deferred retirement accounts such as traditional IRAs and 401(k)s — those pass with no basis adjustment, and withdrawals by the beneficiary are taxed as ordinary income. It also does not apply to assets received as a gift during the giver's lifetime; those carry over the giver's original, lower basis instead (carryover basis), which is one reason lifetime gifting of highly appreciated assets is often less tax-efficient than simply leaving them in the estate. Our step-up in basis calculator and companion capital gains tax calculator let you model exactly how much tax a sale would trigger before and after the step-up.

Gift Tax and Lifetime Giving

The federal gift tax and the estate tax share a single, unified lifetime exemption — the same $15 million figure covers both gifts made during life and property transferred at death, combined. For 2026, an individual can give up to $19,000 to any number of separate recipients in a calendar year without touching that lifetime exemption or filing a gift tax return at all; a married couple can combine their exclusions to give $38,000 per recipient through gift-splitting. Gifts to a spouse who is not a US citizen have their own, higher annual exclusion, set at $194,000 for 2026.

Gifts above the annual exclusion are not necessarily taxed immediately — they are simply reported on IRS Form 709 and subtracted from the giver's remaining lifetime exemption. Only once a person's cumulative lifetime gifts and taxable estate together exceed the full $15 million does gift or estate tax actually become due. This is why annual exclusion gifting is one of the most common, low-friction ways to reduce a large estate's eventual tax exposure over time, without needing to approach the exemption threshold at all. Our gift tax calculator can help you see how a given gift interacts with the annual exclusion and the lifetime exemption.

Do Heirs Pay Income Tax on What They Inherit?

Generally, no. A lump sum or asset received purely as an inheritance is not treated as taxable income to the heir under federal law — receiving your fixed Qur'anic share as a widow, or your residuary share as a son, does not get added to your income tax return as ordinary income. The major exception is inherited retirement accounts. Traditional IRAs and 401(k)s were funded with pre-tax dollars, so every dollar a beneficiary withdraws is taxed as ordinary income, and under the SECURE Act most non-spouse beneficiaries must fully distribute an inherited account within 10 years of the original owner's death (spouses have more flexible options, including rolling the account into their own IRA). Inheriting a large tax-deferred account is exactly the kind of situation where a tax professional's advice pays for itself many times over.

Life insurance proceeds paid to a named beneficiary are also received income-tax-free. However — and this surprises many families — if the deceased owned the policy at death, the death benefit is typically pulled back into the gross estate for federal estate tax purposes, even though the beneficiary receives it tax-free. Large policies are sometimes placed in an irrevocable life insurance trust (ILIT) years in advance specifically to keep the payout outside the taxable estate altogether.

How This Fits Inside Farāʾiḍ Distribution

US tax law and Islamic inheritance law operate on entirely different layers, and once you see the sequence, they coexist without any real conflict. Under farāʾiḍ, four obligations are settled from the estate, strictly in order, before a single share is calculated:

1. Funeral and burial costs, paid without extravagance.
2. Debts — both to people and any financial obligation to Allah such as unpaid zakāh.
3. The bequest (waṣiyya), capped at one-third of what remains, to non-heirs only.
4. Inheritance (mīrāth) — whatever is left, the net estate, divided by the fixed fractions.

Any federal or state estate tax due is an obligation of the estate that is settled at this same early stage — functionally alongside debts — before the net estate is divided among heirs. Tax never changes anyone's Qur'anic fraction; a wife's 1/8, a son's residuary share, a mother's 1/6 all remain exactly the fractions the Qur'an assigns. What tax changes is the size of the pool those fractions are applied to, in precisely the same way an outstanding mortgage or a hospital bill would shrink it.

A Worked Example

Consider a Muslim family in Oregon — a state with a $1,000,000 estate exemption, among the lowest in the country — where the deceased leaves a gross estate of $1,400,000: a home, a retirement account, and savings. There are $40,000 in outstanding debts and funeral costs, and no bequest was made.

• Step 1 — settle debts and costs: $1,400,000 − $40,000 = $1,360,000 taxable/distributable estate.
• Step 2 — check federal exposure: well under the $15,000,000 federal exemption, so no federal estate tax is owed.
• Step 3 — check state exposure: Oregon's exemption is $1,000,000, and the estate exceeds it by $360,000. At Oregon's graduated rates (which reach up to 20% on the amount above the exemption, with the effective rate on the excess portion typically well below the top marginal rate for an estate this size), a rough illustrative state estate tax in the range of $30,000–$40,000 could be due — the exact figure requires running Oregon's actual rate schedule, which is graduated rather than a single flat percentage.
• Step 4 — arrive at the net estate: after debts and the estimated state estate tax, roughly $1,320,000–$1,330,000 remains to be divided by farāʾiḍ.
• Step 5 — apply the Qur'anic shares: if the deceased leaves a wife, one son, and one daughter, the wife takes 1/8 of the net estate, and the remaining 7/8 splits between the children 2:1 in the son's favor — all calculated on the net, post-tax figure, not the original $1,400,000.

This example is illustrative only — actual state tax owed depends on the exact graduated rate schedule in effect, any deductions or credits the estate qualifies for, and professional valuation of the assets involved. Use the inheritance tax calculator to model your own numbers, then the inheritance calculator to see the Islamic shares on the resulting net figure.

Planning Strategies That Respect Both Systems

A Muslim family does not have to choose between minimizing tax and following farāʾiḍ faithfully — the two operate on different layers and can generally be optimized together. A few approaches worth discussing with an advisor:

• Annual exclusion gifting during life. Using the $19,000-per-recipient annual gift tax exclusion (or $38,000 as a couple) over years can meaningfully shrink a large estate before death, without needing to touch the lifetime exemption or wait until the estate is divided by faraid at all — since these are lifetime gifts, not part of the estate being divided.
• Filing Form 706 for portability even when no tax is owed. As covered above, this preserves the DSUE for the surviving spouse at essentially no downside beyond the modest cost of preparing the return.
• Titling assets correctly in community property states to preserve the double step-up in basis, reducing the capital gains bill heirs face when they eventually sell inherited property.
• Structuring a US-valid will alongside an Islamic waṣiyya so that state intestacy law — which does not follow Qur'anic shares — never controls the outcome. Without a will, a probate court applies the state's default inheritance scheme, not farāʾiḍ.
• Reviewing life insurance ownership so that large policies do not unexpectedly inflate the taxable estate, using an ILIT where appropriate.
• Coordinating retirement account beneficiary designations with the overall estate plan, since these accounts pass outside a will by beneficiary designation and are taxed differently (as income to the beneficiary) than the rest of the estate.

None of these strategies change who is entitled to inherit or in what proportion. They only affect how much of the estate is lost to tax before the Qur'anic shares are applied — which is precisely the same goal a non-Muslim estate planner pursues, just layered underneath a distribution scheme fixed by revelation rather than personal preference.

When to Bring in a Professional

Speak to a qualified estate attorney or tax advisor when the estate approaches the federal exemption, when real property sits in a state with its own death tax, when a surviving spouse is not a US citizen, when significant retirement accounts or a business are involved, or when combining an Islamic will (waṣiyya) with US-valid instruments such as a revocable living trust. A specialist can structure the plan so wealth passes efficiently and in line with the Sharīʿah, rather than forcing a choice between the two. To review the underlying Islamic framework first — the four rights of the estate, who inherits, and the fixed fractions — read our complete guide to Islamic inheritance.