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Pennsylvania Inheritance Tax

On Behalf of | Feb 1, 2022 | Firm News |

Written by: Robert Buzzendore, Esquire

Pennsylvania is one of five states with an inheritance tax.  An inheritance tax is a tax on the privilege of receiving property.  In other words, it is a tax on the transfer of an asset from decedent to an heir or beneficiary.

The tax is owed by the person receiving a decedent’s property unless a person’s Will directs the estate to pay the tax for the heirs.  However, a person must use caution when directing the estate to pay the tax because if a non-probate asset is given to a person not named in the Will, the heirs in the Will are paying the other person’s tax.  For example, if a person names X as the heir in the Will but Z receives the 401(k), which is not a probate asset governed by the Will, X is paying Z’s inheritance tax.

The rate of tax is 0% to 15% depending on the person’s relationship to the decedent.  The tax rate for property distributed to a spouse and charities is 0%, children and grandchildren 4.5%, siblings 12%, and all other persons 15%.

The tax is on all assets including retirement plans, vehicles, bank accounts, stocks and real estate.  A 401(k) and IRA may be excluded if the person died before age 59.5.  A Roth IRA is subject to tax regardless of the person’s age at death.  There are two excluded assets: (1) life insurance and (2) a family farm if certain conditions are satisfied and an inheritance tax return is timely filed.

The tax return must be filed within nine months of the date of death unless a six month extension is requested before the expiration of the ninth month.   Interest is owed on any amount owed beginning on the first day after the ninth month even if an extension is obtained.  A 5% discount is given on the amount paid within three months of the date of death.

The tax is based on the value of the assets as of the date of death minus the value of any deduction.  Deductions may include funeral expenses (unless a prepaid funeral plan), debts, medical bills (unless reimbursed or paid by insurance), estate costs, and attorney fees.

A person may believe a way to avoid the tax is to add another person to a bank account or to transfer real estate or another valuable asset to another.  There are disadvantages to these types of transfers.  For example, mom adds son to her bank account as a joint owner.  All of the money in the account is mom’s money.  If son dies before mom, the inheritance tax law presumes 50% of the money is son’s money and mom owes inheritance tax on 50% of the account even though the money in the account was always her money.

A transfer of real estate poses other issues.  Assume mom and dad bought their house in 1960 for $2,000.00.  In January 2022 they give it to daughter who immediately sells it for $200,000.00.  Parents have avoided inheritance tax but daughter has a capital gains tax of 15 or 20% based on a gain of $198,000.00 ($200,000 – $2,000).  If parents gave their house to daughter after their deaths, and the house was worth $200,000 on date of death and daughter sold it for $200,000, there would be no capital gain and no capital gains tax.  The inheritance tax would be 4.5% which is substantially less than 15 or 20%.

There are many other issues to consider regarding the inheritance tax, and this article only highlights certain areas.  Inheritance tax must be considered in conjunction with federal taxes and Medicaid planning.  It is important to evaluate your objectives and plan accordingly. Hoffmeyer & Semmelman is available to assist you in your planning or the administration of an estate.