Who knew that the Commonwealth of Pennsylvania is one of only twenty United States jurisdictions which collect a state death tax?
For the Pennsylvania resident decedent, regardless of whether the beneficiaries live in Philadelphia, Bucks, Montgomery, or Delaware Counties, or beyond the borders of the Commonwealth, the Pennsylvania Inheritance tax will likely impact any inheritance. In this blog, The Pennsylvania Inheritance Tax Explained, we answer eight of the most commonly asked questions.
1. I already filed the decedent’s taxes on April 15th. Why do I need to file a Pennsylvania REV-1500?
Comparing income taxes to state death taxes is like comparing apples to oranges. These are two different taxes. The income tax return is filed with the state and the federal government annually. The income tax is a tax computed on the decedent’s adjusted gross income for the taxable year, reduced by any applicable deductions and credits.
The Pennsylvania Inheritance Tax is a transfer tax on the value of all of the property in the estate of a Pennsylvania resident decedent on the date of death. An inheritance tax return must be filed for every decedent who owns property at the moment just before death. The rate of tax depends on the relationship between the beneficiary receiving the property and the decedent. The tax return (FORM REV-1500 and supporting schedules) for a resident decedent must be filed and the tax paid, no later than nine months after the death of the decedent. However, there is a five percent discount if the tax is prepaid within ninety days following the date of death.
2. What am I required to report on the Inheritance tax return?
All of the taxable property held by the decedent on the date of his death must be reported on the Pennsylvania Inheritance tax return. Taxable property includes all Pennsylvania real estate, regardless of whether the property is held in the decedent’s name alone, as joint tenants with rights of survivorship or tenants in common. Taxable property also includes mineral and gas rights. For example, an estate with an interest in Marcellus Shale property would be required to report the value of the Marcellus Shale property on the REV-1500. The value of the gas or mineral rights is generally computed at the price which an unrelated buyer would pay to an unrelated seller for the property in an arm’s length transaction. Further information on the taxation and valuation of mineral rights and natural gas interests in computing the Pennsylvania Inheritance tax due may be found in the Pennsylvania Department of Inheritance Tax Bulletin 2012-01 (Revised July 13, 2013), available online.
3. What other categories of property must be reported on the Inheritance tax return?
Individual retirement accounts, annuities, pension plan benefits, life estates, trusts, bank and brokerage accounts, and the value of any gifts made within the one-year period preceding the date of death must all be reported on the REV-1500 and supporting schedules.
4. Is there any property that is exempt from the Pennsylvania Inheritance tax?
The proceeds of life insurance are generally exempt from the Pennsylvania Inheritance tax, even if paid to the estate. Transfers to exempt charitable organizations, exempt institutions, and government entities are also exempt from tax. There is a limited exemption for qualified farmlands.
5. The decedent owned farmland in Reading, Pennsylvania. How is farmland treated?
Act 85 of 2012 provides special treatment for family farms. Under 85, farmers may pass their family farms to their relatives, free of Pennsylvania Inheritance tax, which would otherwise have been assessed at a 4 1/2 % rate for a transfer to a child, or at the 12% rate applicable to transfers to a sibling. To qualify for the exemption, the farmland transferred must be devoted to the business of agriculture for seven years following the decedent’s death, must be transferred to members of the same family, and must produce a minimum yearly gross income of at least $2,000.
6. What rate of inheritance tax will apply?
The inheritance tax due is computed at the rate applicable to the beneficiary receiving the property. For decedents dying on or after January 1, 1995, the spousal rate is zero. The rate of a lineal heir (child and step-child, grandchild and step-grandchild), the rate is 4 ½ percent. For decedents dying on or after July 1, 2000, the rate applicable to siblings, half-siblings, and step-siblings is 12%. Transfers to all other beneficiaries are subject to a 15% rate of tax.
7. What rate applies to my inheritance of property from my same-sex spouse?
Under the Whitewood v. Wolf 992 F. Sup. 2d 410 (M.D.Pa.2014) decision, the partners of same-sex marriage are treated as a husband or wife. Inheritances from a same-sex spouse are taxable at the zero percent spousal rate.
8. If my adopted child inherits my property, what inheritance tax rate applies?
Natural or adopted children or step-children of any individual and that individual’s spouse are taxed at a 4 ½ percent rate.
Should you or your family have any questions regarding the Pennsylvania Inheritance tax, please contact our PA offices at (215) 546-5800.
