The Pennsylvania inheritance tax is a transfer tax. The tax applies to assets that are paid to a beneficiary. The amount of the tax is based on the value of the property and the family relationship of the beneficiary to the decadent. Therefore, one of the goals of effective estate planning is to reduce or eliminate the amount of the estate subject to the Pennsylvania inheritance tax.
The state inheritance tax applies to an estate of anyone who lives in Pennsylvania or who owns real estate or tangible property in Pennsylvania. The beneficiaries who receive the property are required to pay the tax. As a practical matter, the estate calculates the amount of the tax, files an inheritance tax return typically, and then pays the amount of the tax. The tax is paid on any assets the decedent controlled, such as real estate, bank accounts, car titles, and revocable trusts. Generally, a decedent (while alive) does not control an irrevocable trust – so there’s no inheritance tax on an irrevocable trust.
Typically, the executor or administrator will complete PA Department of Revenue Form 1500 if the decedent was a Pennsylvania resident. This form must be completed within nine months of the date of death of the decedent – to avoid any interest charges or penalties. PA Department of Revenue Form 1737 is used if the decedent lived outside of Pennsylvania but owned property in Pennsylvania. In addition to filing the forms with the state, the forms are also followed with the County Register of Wills where the decedent resided or where the property of an out-of-state resident is located.
What are the Pennsylvania inheritance tax rates?
The Pa tax inheritance tax rates are as follows:
- 0% tax rate. The surviving spouse does not pay a Pennsylvania inheritance tax. Charities and the government generally are exempt from paying the tax as well. Parents, stepparents, and adoptive parents who inherit from a child under 21 do not have to pay an inheritance tax.
- 4.5% tax rate. Transfers to children, parents, grandparents and other direct descendants such as step-children and adopted children are taxed at a 4.5% rate. Transfers to an ex-spouse are taxed at 4.5% unless the spouse remarries.
- 12.% tax rate. Siblings, including half-brothers and half-sisters, pay a 12% transfer rate. Step-siblings do not qualify for this rate.
- 15% tax rate. Anyone else who inherits from the decedent pay 15%. This rate applies to aunts, uncles, nieces, nephews, cousins, in-laws, friends, and others who don’t qualify for a lower rate.
Same-sex spouses in Pennsylvania generally are charged the full 15% rate.
Are there any exemptions to paying the Pennsylvania inheritance tax?
Pennsylvania does have an exemption for family farms provided specific criteria are amount. The criteria require that transfer be to a family member, and the farm must be used as an agricultural business for seven years. Additional criteria may apply depending on the value of the farm and the number of employees.
The beneficiaries of life insurance proceeds are exempt from paying the inheritance tax – whether the insurance is payable directly to a beneficiary or the estate.
What costs can be deducted on the Pennsylvania Inheritance tax return
The executor or administrator can deduct certain expenses from the value of the assets. The tax is paid on the net amount (the amount after deductions). The expenses that can be deducted include:
- The decedent’s debts, such as tax bills, mortgages, credit cards bills, and medical bills – provided the bills are paid.
- Certain estate expenses include the executor’s fee, the lawyer who helps the executor manage the estate, the funeral and burial costs, and any necessary filing fees.
The Pennsylvania inheritance tax return is complicated. There are numerous schedules/pages. A skilled Central Pa probate lawyer understands what assets and expenses must be reported. Your estate lawyer also understands other issues that may arise. For example, the value of a home may require an appraiser if it is not sold. However, if the home is sold, then the home’s value is usually the net proceeds of the sale. An experienced estate lawyer also helps with other tax returns such as the decedent’s income tax returns, the federal estate tax return, and fiduciary tax returns.
At Antanavage Farbiarz, our Harrisburg wills and estate planning lawyers guide executors through the estate administration process, including preparing and filing the Pennsylvania inheritance tax return. To speak with a seasoned probate and estate administration lawyer, call us at (610) 562-2000 or complete our contact form to schedule an appointment.