Gifting your property away gradually throughout several years can be a great way to reduce the taxable part of your estate and ease the financial burden on your heirs. This principle is particularly essential to Pennsylvania residents who want to preserve their legacy as much as possible and transfer it to heirs without any adverse side effects.
While Pennsylvania does not impose a state gift tax, it still has the estate (inheritance) tax, which is:
- 4,5% to direct descendants;
- 12% to siblings;
- 15% to other heirs.
Moreover, liberated from the state gift tax, Pennsylvania residents may still become responsible for the federal gift tax due.
In this article, we shall discuss the principles of gift taxation in Pennsylvania, its correlation with the estate tax, and the application of annual gift tax exclusion.
What is the annual gift tax exclusion, and why does it matter to Pennsylvania residents?
Gifting away cash, estate, stocks, and bonds or even landing money or investing into someone’s business, you may be making a taxable gift.
While the state gift tax is not relevant for Pennsylvania, federal taxation applies to all U.S. citizens.
The annual gift tax exclusion allows you to make up to $15,000 gifts to as many people as you wish every year.
Suppose you have 2 kids. It means that you can gift away up to $30,000 of your property without having to file the Form 709: U.S. Gift (and Generation-Skipping Transfer) Tax Return.
Once you are married, the sum doubles and becomes $60,000 per year.
However, it is essential to know that Pennsylvania is a pretty peculiar state from a fiscal point of view. While it technically has no local gift tax, there is a so-called “one-year-look-back.” It means that all gifts that a decedent makes within a year are automatically included in the estate and become subject to state inheritance taxation.
At the same time, the Pennsylvania estate tax does not apply to a surviving spouse or the second parent of a common child under 21 years old. Moreover, gifts between two spouses who are both U.S. citizens are not considered taxable even if they exceed the $15,000 annual tax exclusion limit.
Planning your estate in Pennsylvania, it is essential to understand local fiscal peculiarities. You can benefit from the principle of $15,000 gift tax exclusion and gradually reduce the taxable part of your estate, making arrangements with spouse and direct descendants to ease their inheritance tax burden.
However, it is essential to remember the one-year lookback rule, set to avoid the deathbed giving, and address qualified professional assistance in advance to get the most out of local and federal taxation principles without adverse side effects for you and your heirs.