Pennsylvania does not charge an estate tax. However, Pennsylvania is one of the few states that impose an inheritance tax on property owned by a resident of Pennsylvania, and certain property located in Pennsylvania owned by a nonresident.
An Estate Tax is Not The Same as an Inheritance Tax
An estate tax is charged on the entire estate regardless of whom the beneficiaries might be. However, an inheritance tax is based on who receives the property. When filing the estate tax return, be sure you have a skilled estate attorney at your disposal.
Which Beneficiaries Are Subject To Inheritance Tax?
It all depends on your relationship with the deceased.
Categories of beneficiaries, their applicable exemptions and tax rates are:
- Surviving spouses – Any transfers to a surviving spouse are taxed at a zero (0%) percent rate.
- Charitable beneficiaries – Transfers to exempt charitable organizations, exempt institutions, and government entities are entirely exempt from the Pennsylvania inheritance tax.
- Class A – Property passing to grandparents, parents, descendants (including natural descendants, adopted descendants and step-descendants), and an un-remarried spouse of a child is taxed at four and one-half (4.5%) percent. This class may be entitled to a $3,500 family exemption from the Pennsylvania inheritance tax.
- Class A1 – Property passing to brothers, half-brothers, sisters, half-sisters, and persons having at least one parent in common with the decedent, either by blood or by adoption, is taxed at twelve (12%) percent. Class A1 beneficiaries do not receive any exemption from the Pennsylvania inheritance tax.
- Class B – Property passing to all other beneficiaries is taxed at fifteen (15%) percent. Class B beneficiaries do not receive any exemption from the Pennsylvania inheritance tax.
- Minor children – For deaths occurring on or after July 1, 2000, transfers from the estate of a child age 21 or less to the child’s natural parent, stepparent, or adoptive parent are taxed at a zero (0%) percent rate.
Exemptions for Farms and Family Owned Businesses
The Pennsylvania legislature also has exemptions for certain kinds of properties. Farms are exempt from the inheritance tax, as long as the land is inherited by the immediate family and the land continues to be used for agriculture for the future 7 years. Recently, the Pennsylvania legislature has also exempted family owned businesses if certain requirements are met. As laws keep changing and evolving, it is important to consult with an experienced estate attorney.
The Pennsylvania inheritance tax return is a complex document requiring in-depth information and schedules where the transferor’s property and liabilities are listed. In addition, different tax rates apply to different beneficiaries. Therefore, it is imperative that you have an experienced estate attorney ready to guide and support you throughout the procedure.