What Do I Need to Do to Figure out What I Owe in Inheritance Tax in Pennsylvania?

Determining the taxes owed on an inheritance in Pennsylvania is not usually a beneficiary’s headache. In most cases, the executor or administrator of the estate is responsible for making the calculation; after he’s done so, you’ll receive the balance of your bequest after the taxes are paid. However, if you’re the executor, the job falls to you. If you inherit an asset that does not pass through probate, you’re also responsible for figuring out and paying any inheritance tax due.

Nature of Inheritance

First you must determine whether your inherited asset is subject to inheritance tax in the first place, although in Pennsylvania, most are. For tax purposes, the decedent’s estate includes both probate and non-probate assets. Probate assets generally include items with titles attached, such as automobiles and real estate, as well as bank accounts, investment accounts and personal property. Non-probate assets are those that pass directly to a named beneficiary, such as retirement benefits or jointly-held property with another individual. All are subject to Pennsylvania’s inheritance tax. However, if you’re the named beneficiary of the decedent's life insurance policy, that money is exempt. Depending on your relationship to the deceased, you might also claim a $3,500 family exemption to avoid paying taxes on certain items of personal property.

Value of Inheritance

If your inheritance is taxable, you must next determine its value, which is relatively easy with cash and investment accounts, but if you inherit real estate, you’ll probably want to have it appraised. After you establish the value, you can make certain deductions from that number. For example, if you’re the executor and the sole beneficiary of the estate, you can subtract the costs of operating the estate and the decedent's debts from the estate's value. If you co-owned an asset with the deceased before his death, only the value of his half of the asset counts for tax purposes; there is no levy against your own portion. Pennsylvania law says the value of the asset is what it was worth on the date the deceased died.

Relationship to Deceased

After you’ve established the value of what you’ve inherited, your inheritance tax is a percentage of that value. The percentage depends on your degree of kinship with the deceased. If you’re his spouse, you don’t have to pay any inheritance tax at all. However, if you’re his child, grandchild, parent or grandparent, you must pay 4.5 percent of the value. If you’re his sister or brother, you must pay 12 percent. If you’re more distantly related, or not related to the deceased at all, your inheritance tax is 15 percent as September 2011.

Tips

Pennsylvania offers an additional 5 percent deduction from the inheritance tax you owe if you file the return and pay the tax due within three months of the decedent’s death. If you don’t want to claim the 5 percent deduction, you have nine months from the date of death to file the return and make your payment before penalties begin to accrue.

References

• Pennsylvania Department of Revenue: Difference Between Inheritance Tax, Estate Tax and Death Tax in PA
• Pennsylvania Department of Revenue: What is Included in a Person’s Estate That is Subject to Inheritance Tax?
• Pennsylvania Department of Revenue: How Much of an Estate is Subject to Inheritance Tax?
• Bucks County Register of Wills: Pennsylvania Inheritance Tax – Commonly Asked Questions
• Allegheny County, Pennsylvania: Inheritance Tax