Pennsylvania imposes an inheritance tax on persons who inherit property from persons not closely related to them. The tax rate is dependent on their familial relationship. However, some exceptions may apply.
Inheritance tax is collected when the deceased is either:
- A resident of Pennsylvania; or
- A person who owns real or tangible property in Pennsylvania.
Are There State Estate or Inheritance Taxes?
Yes, there are state estate or inheritance taxes. Some states within the United States collect estate taxes/inheritance taxes in addition to the federal estate tax.
States which collect inheritance taxes include:
- New Jersey; and
Each of these states has its own laws defining who is exempt from state inheritance taxes. It means some estates or individuals in the states listed above may not have to pay inheritance taxes.
There are some states which have only an estate tax. These include:
- New York;
- Rhode Island;
- Washington State; and
- Washington D.C.
Exemptions for Farms and Businesses
Pennsylvania does have special exemptions for farms and businesses. To use the tax exemption for farmland, the farm must:
- Be left to family members,
- Produce at least $2,000 yearly gross income,
- Continue to be used for agricultural purposes for seven years.
To use the tax exemption for small businesses, the business must:
- Be wholly owned by the decedent and their family,
- Be left to family members and stay in operation for seven years,
- Have been in existence five years prior to the death of the decedent,
- Have less than 50 employees,
- Have less than $5 million in assets,
- The principal purpose of the business cannot be the management of income-producing assets.
Pennsylvania has four tax rates based upon the inheritor’s relationship with the decedent.
Only a select few are exempt from inheritance tax. Those include:
- Surviving spouse
- Parents who inherit from children who were 21 or younger at the time of death
- Charitable organizations and government entities
Pennsylvania carved out a Class A group of people who pay a 4.5% tax rate. Relative to the decedent, those people include:
- Lineal descendants (i.e., children, grandchildren, great-grandchildren, etc.)
- Parents and grandparents
- Spouse of a child
- Surviving spouse of a child, if the surviving spouse did not remarry
Siblings of the decedent pay a 12% tax rate. This applies irrespective of whether the sibling is adopted or half-blooded.
All other inheritors pay a 15% tax rate.
What Are the Federal Estate Tax Laws, and Have Estate Taxes Been Repealed by Congress?
Federal estate taxes tax an individual’s right to transfer property at death. Federal estate taxes have been imposed on estates since 2021. Up to 40% of the estate’s value can be taxed.
Many estates will not exceed their lifetime exclusion, which means they will not be taxed. As of 2021, the lifetime estate tax exclusion for individuals and married couples is $11.7 million.
An additional federal estate tax law allows for a marital deduction. It allows a decedent’s estate to pass tax-free to their surviving spouse.
By using the marital deduction, the estate of the first spouse passes tax-free to the surviving spouse. Federal or state estate taxes will be imposed on the estate value remaining after the second spouse passes away.
When Is Tax Collected?
The executor must file a tax return for the estate within nine months of the decedent’s death. Even if multiple people inherit, only one tax return is required. Taxes must be paid out of the decedent’s estate before distribution. An extension may be filed and a penalty assessed if the tax is not filed within nine months.
How Are Inheritance Taxes Calculated?
Inheritance taxes are imposed on property received by heirs or beneficiaries after a property owner dies. A beneficiary or heir of a will is usually a family member or close friend.
Typically, inheritance taxes are calculated based on both the value of property received by the beneficiary or heir and their relationship to the decedent.
An inheritance tax is a tax on the right of a beneficiary to receive property from an estate.
Several factors are considered by a court when calculating inheritance taxes, including:
- Any outstanding debts which the decedent left over;
- Whether the decedent previously made transfers to charitable organizations;
- Whether or not the decedent made transfers to their spouse; and
- Whether the decedent claimed certain losses, such as theft losses or investment losses.
Can Anything be Done to Minimize Inheritance Tax Liability?
Inheritance taxes can result in substantial financial burdens for beneficiaries. Any person who receives property upon someone else’s death is also subject to it.
Tax requirements may outweigh the benefits of transferring assets through an estate distribution in many cases. Beneficiaries receiving property or assets can take numerous steps to minimize death tax liability.
There are several possible approaches to reducing inheritance and estate taxes, which may include:
- The transfer of assets prior to an individual’s death using financial and legal mechanisms such as:
- Purchasing life insurance for the estate holder, which may serve to offset some of the costs;
- Inquiring about different inheritance and estate tax payment options; and
- Creating a family trust, which sometimes allows transfers to be made to family members at less than full value.
Evading taxes is not the best way to minimize one’s tax liability. Individuals should pay their taxes if they legally owe them.
What Are Some Other Issues Connected with Inheritance Taxes?
Inheritance and death taxes are often associated with various legal violations, disputes, and issues. Each estate is unique and different, so the issues may vary from case to case.
Tax laws vary from state to state, as previously mentioned. Inheritance and death taxes often involve the following legal issues:
- Tax evasion or tax fraud; and
- The non-payment of taxes.
An individual attempting to avoid paying taxes is accused of tax evasion or tax fraud. Individuals can take steps to legally minimize their inheritance and death tax liability.
Using fraud to reduce an individual’s tax liability is illegal, however. Individuals may be liable for death taxes if they intentionally defraud or deceive the government or a tax agent.
Fraudulent behavior of this type can often lead to criminal charges. Fines and other penalties are often associated with criminal punishments.
Failure to pay inheritance or death taxes can also have consequences for individuals. The party responsible for handling taxes may also face legal consequences if they fail to pay them intentionally.
Consulting an Attorney
If you are concerned with inheritance tax or want to potentially reduce the amount owed, please consult a Pennsylvania inheritance lawyer. They will help you straighten out your affairs for peace of mind and lower your beneficiaries’ tax obligations.
In order to avoid estate taxes, you can use a variety of estate planning tools. Before you pass away, estate attorneys can assist you in planning your estate and protecting your assets.
You can avoid estate taxes by establishing trusts or making gifts during your lifetime. Your Pennsylvania attorney can also draft any estate planning documents.
Find the right Pennsylvania estate attorney for your needs using LegalMatch today. You don’t want to get into tax trouble with the IRS. Let an attorney handle your tax issues instead by using LegalMatch.