Pennsylvania Inheritance Tax
Planning for what takes place after your death is never easy. It can be particularly complicated when it comes to planning for what happens to your money and estate. When you’re conducting estate planning, it’s important to note that there are differences between estate and inheritance taxes and variances between federal and state taxes. If you live in Pennsylvania, you’re not subject to estate tax but you will be subject to inheritance tax.
What is the Pennsylvania inheritance tax?
An inheritance tax is a tax assessed on the property or money that you inherit upon the death of someone else. As the beneficiary, you are responsible for paying the tax. This is different from an estate tax, where the estate of the deceased person is responsible for paying the tax due prior to the assets being distributed to the beneficiaries.
Currently, inheritance taxes are imposed by the state where you reside, and as of 2022, only six states have an inheritance tax: Pennsylvania, Maryland, Iowa, Kentucky, Nebraska, and New Jersey. There is no federal inheritance tax. There is, however, a federal estate tax that can range from 18% to 40% and generally applies to estates over $12 million. There are also some states that impose a state estate tax.
What is the inheritance tax in Pennsylvania?
If you’re planning on transferring your assets to a surviving spouse in Pennsylvania, the good news is that the inheritance tax in that scenario is 0%. There is also a 0% tax if you’re giving your assets to your child aged 21 or younger. Any property that is jointly owned between spouses is not subject to inheritance tax.
If your direct descendants or lineal heirs fall outside of the above, there is a 4.5% tax inheritance tax in Pennsylvania. Lineal heirs refer to heirs such as grandchildren. If you’re leaving assets to a sibling in PA, that is taxed at a 12% rate. For other heirs, except charitable organizations or institutions exempt from tax, you’ll be dealing with a 15% tax rate.
In Pennsylvania, inheritance tax is due upon death and becomes delinquent nine months after death. However, if you pay the tax within the first three months of death you receive a 5% discount.
If the property is located in Pennsylvania, the tax is due in PA, even if the heir or descendant is located out of state.
What is subject to inheritance tax?
All real and tangible personal property is subject to inheritance tax – including assets such as cash and property, and physical items like their vehicle, furniture, jewelry, etc. Intangibles such as bank accounts, stocks, bonds, etc. are also included and subject to inheritance tax in Pennsylvania if the descendant resides in PA – if the descendant doesn’t reside in PA, just the physical property is taxable.
How can I plan for inheritance tax?
There are a few ways you can plan ahead to minimize the impact of inheritance tax in Pennsylvania. Working with a tax professional and a financial advisor can help you to understand your specific situation when it comes to estate planning.
Talk to your tax professional and financial advisor to see if gifting assets may be a better strategic move. You can also investigate purchasing life insurance, as life insurance benefits are not subject to inheritance tax. If you have several heirs, you may wish to pass along your physical assets to those that will be taxed at lower rates (your direct descendants) and then purchase life insurance to give money to other heirs that might be taxed at a higher rate (such as a sibling or other heir). Talk to your financial advisor about converting any IRAs to a Roth IRA, as those distributions are free from tax after you pay the tax at conversion.
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