An Overview of Pennsylvania Inheritance Tax Laws
How Pennsylvania Inheritance Taxes Can Affect an Estate
Pennsylvania is one of six states that collects a state inheritance tax. The tax is levied on certain property owned by Pennsylvania residents, as well as on real estate and tangible personal property located in Pennsylvania that is owned by a nonresident.
Transfers of property made from a deceased individual to a living individual are subject to an inheritance tax whether the transfer occurs according to the terms of a last will and testament, by state law when the deceased doesn't leave a will, or through a living trust.
Estate Taxes vs. Inheritance Taxes—What's the Difference?
An estate tax is charged against the entire value of an estate regardless of who the beneficiaries might be. It's a percentage of the overall value of all a decedent's property and assets owned at the time of her death. Pennsylvania doesn't have an estate tax, although there's one at the federal level.
An inheritance tax is charged against each share of the estate going to certain beneficiaries. They're technically liable for paying this tax, although sometimes it happens that the estate will step in and pick up the tab, particularly if instructions to do so are included in the deceased's will or living trust documents.
The federal government does not impose an inheritance tax, but Pennsylvania does. The overall value of the estate is not a factor. All that matters is the value of each specific bequest and who it goes to.
Which Beneficiaries Are Subject to the Inheritance Tax?
Each beneficiary of a Pennsylvania estate receives—or does not receive—an exemption from the state inheritance tax based on his degree of kinship to the decedent. Transfers to surviving spouses are entirely exempt from the Pennsylvania inheritance tax.
Transfers from the estate of a child age 21 or younger to the child's natural parent, stepparent, or adoptive parent are entirely exempt from the Pennsylvania inheritance tax as well. So are transfers to exempt charitable organizations, exempt institutions, and government entities.
Beyond this, beneficiaries are categorized into classes.
Class A includes grandparents, parents, and lineal descendants, including natural descendants, adopted descendants, and step-descendants—your children, their children, their grandchildren and so on. Natural children who have been adopted by someone else are still considered Class A beneficiaries. The spouse of a child who has not remarried after that child's death also falls into Class A. These relatives receive a $3,500 family exemption from the Pennsylvania inheritance tax.
Class A1 includes brothers, half-brothers, sisters, and half-sisters—persons having at least one parent in common with the decedent either by blood or by adoption. Class A1 beneficiaries do not receive any special exemption from the tax.
Class B includes all other beneficiaries. They don't receive any exemption from the Pennsylvania inheritance tax, either. This includes same-sex partners, although not same-sex spouses because they're entitled to the spousal exemption.
What Are the Pennsylvania Inheritance Tax Rates?
Class A beneficiaries pay the lineal tax rate. They're subject to a 4.5 percent tax. Class A1 beneficiaries are taxed at the sibling rate of 12 percent, and Class B beneficiaries pay the collateral tax rate of 15 percent.
These Rules Changed in 1995 and 2000
Initially, there were only two inheritance tax rates under Pennsylvania law: 6 percent and 15 percent. The lower rate applied to lineal descendants and included stepchildren and their offspring. The 15 percent rate was for "collateral" beneficiaries, which is a legal way of saying pretty much everyone else.
Then, in 1995, new legislation was passed to provide for a third-rate—zero—for surviving spouses. Before this time, only assets which passed to a spouse because the property was held with rights of survivorship were totally exempt.
Effective June 30, 2000, the 6 percent rate was cut to 4.5 percent, where it still stands as of 2018. The current 12 percent rate for siblings was introduced at this time as well.
Some Lifetime Gifts May Be Taxable, Too
The Pennsylvania inheritance tax also includes some tricky rules concerning lifetime gifts in addition to those passed to beneficiaries through your estate after your death.
You might pass your entire estate on to your son or daughter during your lifetime, but if you don't live at least one more year, the balance over $3,000 becomes taxable at the 4.5 percent rate.
If you give her your house with the understanding that you want to remain living there until your death, it becomes taxable as an inheritance when you die even though you gifted it while you were still living.
Family Farms Are Exempt
Working family farms and some related agricultural commodities are exempt from the Pennsylvania inheritance tax for deaths occurring on or after June 30, 2012, but there are a good many qualifying rules.
The transfer of the farmland must be between members of the same family, and the land must continue to be devoted to the business of agriculture for at least seven years beyond the decedent's date of death. The farmland must produce a yearly gross income of at least $2,000.
If a tract of farmland was initially exempt from the tax but is no longer devoted to the business of agriculture within seven years beyond the decedent's date of death, the tax will be recaptured in the amount that would have been paid, plus interest.
Aside from land used for the business of agriculture, the transfer of an agricultural commodity, agricultural conservation easement, agricultural reserve, agricultural use property, or a forest reserve to lineal descendants or siblings is exempt from the inheritance tax in Pennsylvania.
Is Life Insurance Included in a Pennsylvania Estate?
All payments received from a life insurance contract are exempt from the Pennsylvania inheritance tax whether they're paid to the estate or to some other beneficiary.
What Pennsylvania Inheritance Tax Forms Must Be Filed?
Estates of Pennsylvania residents should file the Pennsylvania inheritance tax return, Form REV-1500, on behalf of their beneficiaries. It's due no later than nine months after the decedent's date of death. The inheritance tax should also be paid within the same time frame or interest will begin to accrue.
The estates of nonresidents who own real estate or tangible personal property located in Pennsylvania should file the Inheritance Tax Return of Nonresident Decedent, Form REV-1737A. This is also due no later than nine months after the date of death and the tax should be paid at the same time or interest will begin to accrue.
A 5 percent discount can be granted when the tax is paid within three months of the date of death,
Estates can request an extension of time to file a return at any point up until the due date, but the state will begin charging interest regardless nine months and one day from the decedent’s date of death on any tax that remains unpaid after this point.
Where Should Pennsylvania Inheritance Tax Forms Be Filed?
File the completed return for a resident in duplicate with the Register of Wills of the county in which the decedent was a resident at the time of death.
File the completed return for a nonresident with the PA Department of Revenue, Bureau of Individual Taxes, Inheritance Tax Division - Nonresident, P.O. Box 280601, Harrisburg, PA 17128-0601.
Pennsylvania inheritance forms and instructions can be found on the Department of Revenue's website.
The information contained in this article is not tax or legal advice and is not a substitute for such advice. State and federal laws change frequently, and the information in this article may not reflect your own state’s laws or the most recent changes to the law. For current tax or legal advice, please consult with an accountant or an attorney.