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Alabama and the Federal Estate Tax
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Alabama and the Federal Estate Tax

Alabama has no state estate or inheritance tax, so only the federal estate tax can apply. Learn the 2026 exclusion, portability, and what counts in the estate.

By Settled Editorial

Most Alabama families will never owe any estate tax. Alabama levies no state estate tax and no inheritance tax, so the only estate-level tax that can reach an Alabama estate is the federal one. And the federal estate tax touches very few estates: the exclusion is high enough that the overwhelming majority of estates pass to heirs completely tax-free.

Still, if an estate is large, or if a surviving spouse could benefit from a filing decision, the federal rules matter. This guide explains the federal estate tax as it applies to Alabama families, including the current exclusion, the portability election, what counts in the estate, and how the estate tax differs from the step-up in basis.

Alabama Has No State Estate or Inheritance Tax

Start with the good news for Alabama families: the state imposes no estate tax and no inheritance tax.

Alabama's old estate tax under Ala. Code 40-15-2 was a "pickup" tax. It equaled the federal credit for state death taxes and collected only what the federal government already allowed as a credit, so it cost estates nothing extra. When federal law phased out that credit, the Alabama tax became inoperative. The Alabama Department of Revenue states that the estates of decedents dying after December 31, 2004 do not file an Alabama estate tax return.

Alabama also has no inheritance tax, which is a separate tax some states levy on the people who receive an inheritance based on their relationship to the decedent. Alabama has neither kind of state death tax. So for an Alabama estate, the analysis is simple: the state takes nothing, and only the federal estate tax can apply.

One caution: if you inherit property located in another state, or from someone who lived in a state that does levy an estate or inheritance tax, that state's rules can still apply to the property within its borders. Living in Alabama does not shield out-of-state property from another state's death tax.

The Federal Estate Tax Exclusion

The federal estate tax applies only to estates whose value exceeds the basic exclusion amount, the exemption threshold set by federal law.

For deaths in 2026, the federal basic exclusion is $15 million per person. That means:

  • One person can pass up to $15 million free of federal estate tax.
  • A married couple can shield up to $30 million using portability (covered below).
  • Only the amount above the exclusion is taxed.
  • The top federal estate tax rate is 40%.

The exclusion is indexed for inflation, so it rises in future years. Because the effective tax reaches only the amount over $15 million, the effective rate on an entire estate is always below 40%, and for the vast majority of Alabama estates it is zero.

A Note on the 2026 Law

Many older estate planning documents warned that the exclusion would roughly cut in half at the start of 2026 under a sunset provision in the 2017 tax law. That sunset did not take effect. Under current federal law the exclusion is $15 million per person for 2026, indexed going forward. If your plan includes trusts or gifting programs designed around a lower exclusion, review it with your attorney, because the strategy may no longer be needed and could even be counterproductive given the step-up in basis rules.

What Counts in the Gross Estate

The "gross estate" for federal purposes is broader than what passes through probate or is listed in a will. Under Internal Revenue Code Sections 2031 through 2046, it generally includes:

  • Real estate, bank and brokerage accounts, stocks, and bonds
  • Life insurance proceeds on a policy the decedent owned or controlled (ownership, not who the beneficiary is, drives inclusion)
  • Retirement accounts such as IRAs, 401(k)s, and 403(b)s
  • Business interests and closely held company stock
  • The decedent's share of jointly owned property
  • Assets in a revocable living trust
  • Certain gifts made within three years of death, particularly transfers of life insurance
  • Powers of appointment the decedent held

Someone with a paid-off Alabama home, a large IRA, and a life insurance policy can have a gross estate far bigger than their probate estate, because most of those assets pass outside probate but still count for the estate tax. The gross estate is then reduced by debts, funeral and administration expenses, and the deductions below to reach the taxable estate.

Deductions That Shrink the Taxable Estate

Two deductions eliminate estate tax for most families, even wealthy ones:

Unlimited marital deduction. Property left outright to a surviving spouse who is a U.S. citizen passes free of federal estate tax with no dollar limit. This is why most married couples owe nothing when the first spouse dies. The tax is deferred, not erased, and can apply when the second spouse dies.

Unlimited charitable deduction. Property left to a qualified charity is fully deductible from the estate, dollar for dollar.

Debts, funeral costs, and estate administration expenses also reduce the taxable estate.

Portability: The Filing That Can Save a Spouse Millions

When the first spouse in a marriage dies, their unused federal exclusion does not vanish automatically. Under the portability election, the surviving spouse can claim the deceased spouse's unused exclusion, called the deceased spousal unused exclusion, or DSUE, and add it to their own.

Example. A husband dies in 2026 with a $4 million estate and uses $4 million of his $15 million exclusion. His remaining $11 million can transfer to his wife. She then has her own $15 million exclusion plus his $11 million, a combined $26 million shielded from estate tax.

Here is the trap: portability is not automatic. The executor must file IRS Form 706, the United States Estate Tax Return, to make the election. The return is due nine months after death, with a six-month extension available. Portability requires the filing even when the estate owes no tax and is far below the exclusion.

Many families skip Form 706 because "we do not owe anything." That choice can cost the surviving spouse a great deal if the couple's combined estate later grows past one exclusion. Filing solely to preserve portability is a straightforward step an attorney can handle.

When Form 706 Must Be Filed

File Form 706 when any of these apply:

  • The gross estate plus adjusted taxable gifts exceeds the exclusion (tax may be owed).
  • You want to elect portability to preserve the deceased spouse's unused exclusion.
  • The estate has generation-skipping transfers to allocate.

The return is due nine months after the date of death. Form 4768 grants an automatic six-month filing extension, but any tax owed is still due at the nine-month mark, since the extension covers filing, not payment. Form 706 is one of the more complex federal returns, so estates that must file it usually benefit from a CPA or estate attorney to document valuations, claim deductions, and elect portability correctly.

Gifts During Life and the Annual Exclusion

The federal gift tax and estate tax are unified: lifetime gifts and transfers at death share the same lifetime exclusion.

Annual gift exclusion. For 2026, you can give up to $19,000 per recipient per year without touching your lifetime exclusion or filing a gift tax return. A married couple can give $38,000 per recipient, and there is no limit on the number of recipients.

Gifts that never count. Some transfers are entirely outside the gift tax: amounts paid directly to a medical provider for someone's care, amounts paid directly to a school for someone's tuition, gifts to a spouse, and gifts to qualified charities.

Larger gifts. A gift above the annual exclusion uses part of your lifetime exclusion and requires IRS Form 709. Filing the return does not mean you owe tax; it simply records the gift against your lifetime amount. Because the interplay between gift tax, estate tax, and capital gains can get complex, get advice before making large lifetime gifts.

Estate Tax Is Not the Step-Up in Basis

Two very different taxes get confused here, so keep them separate.

The federal estate tax is a transfer tax on the value of the estate at death. It applies only above the $15 million exclusion, so it reaches almost no one.

The step-up in basis is an income-tax rule that applies to nearly every inherited asset regardless of estate size. Under IRC Section 1014, an inherited asset's cost basis resets to its fair market value on the date of death. That lowers the capital gains tax the heir owes when they later sell. Alabama is a separate-property state, so only the decedent's share of jointly owned property steps up. See the Alabama step-up in basis guide for how the basis reset works and how Alabama taxes any gain.

For the great majority of Alabama families, the step-up is the tax rule that actually matters, not the estate tax. If you sell an inherited home, our guide on selling inherited property in Alabama walks through how the stepped-up basis limits the gain.

Practical Takeaways for Alabama Families

Most Alabama estates need no estate tax planning at all. The exclusion is high, and Alabama adds no state layer. The practical moves are usually these:

  1. Confirm you are under the exclusion. Add up everything, including life insurance you own and retirement accounts, not just probate assets. If the total is well below $15 million, no federal estate tax applies.
  2. Preserve portability for a married couple. If one spouse dies, consider filing Form 706 to lock in the unused exclusion, even when no tax is due. It is a low-cost safeguard.
  3. Lean on the step-up. Holding appreciated assets until death gives heirs a stepped-up basis. Gifting those same assets during life hands the recipient your old basis and wastes the step-up.
  4. Get help only if the estate is genuinely large or complex. Business interests, farms, out-of-state property, blended families, or an estate approaching the exclusion are the cases where an attorney and CPA earn their fee.

To estimate what settling an estate costs in your county, use our Alabama probate fee calculator, and see the Alabama probate costs guide for how the pieces add up.

Frequently Asked Questions

Does Alabama have an estate tax or inheritance tax?

No. Alabama has no state estate tax and no inheritance tax for deaths after December 31, 2004. The only estate-level tax an Alabama family can face is the federal estate tax, and it reaches only estates above the federal exclusion.

How much can I leave without owing federal estate tax?

For deaths in 2026, the federal basic exclusion is $15 million per person. A married couple can shield up to $30 million using portability. Only the amount above the exclusion is taxed, at rates up to 40%.

Do I need to file a federal estate tax return in Alabama?

You must file IRS Form 706 if the gross estate plus lifetime taxable gifts exceeds the exclusion, or if you want to elect portability for a surviving spouse. It is due nine months after death, with a six-month extension available.

What is portability and why does it matter?

Portability lets a surviving spouse add the deceased spouse's unused exclusion (the DSUE) to their own. It is not automatic. The executor must file Form 706 on time, even when no tax is due, or the unused exclusion is lost.

Is the step-up in basis the same as the estate tax?

No. The federal estate tax is a tax on the estate at death. The step-up in basis is an income-tax rule that resets an inherited asset's cost basis to its date-of-death value, which lowers capital gains tax when you later sell.

Related Alabama Guides

Sources

Last Updated: July 2026. This guide provides general information about the federal estate tax as it applies to Alabama estates. Tax law is complex and changes frequently. Consult a tax professional or estate planning attorney for advice specific to your situation. It is not legal advice.