Our clients in the Keystone state ask us a lot of tax questions. Income tax questions are rather easy, but what about the Pennsylvania estate tax, gift tax and inheritance tax?
In this article, we’re going to take a look at some of the assessed Pennsylvania taxes. We will examine them as they relate to Pennsylvania and also give you some planning tips along the way.
Table of contents
Does Pennsylvania have an estate tax?
Fortunately, Pennsylvania does not have an estate tax. But just because you don’t have an issue at the state level does it mean that this can’t be a problem at the federal level. If your estate exceeds the federal exemption amount you could face a huge liability.
Federal estate tax exemption
The federal estate tax has been around in a variety of forms for decades. The exemption amount and rates have gone up and down, but the tax still exists.
Some people call it the death tax. Whatever you call it, make sure you understand how it works and do whatever you can to avoid it.
The estate tax calculation is rather basic. When someone passes away, an executor is assigned to administer the estate. The executor should oversee the calculation of any estate tax due and also make sure that estate tax returns are filed.
The starting point is looking at all of the assets of the decedent. These could include household and personal items like cars, boats and planes. But they will also include investment accounts, retirement accounts, life insurance, real estate, and any businesses owned by the decedent.
Valuing the investment accounts and retirement accounts at date of death is simple. But things get a little bit trickier when you look at real estate, farms, and businesses owned.
A formal appraisal is often required and business valuations can be complex. Make sure that you do your due diligence to ensure the valuations are accurate with a goal in mind of limiting the estate.
Once the assets are all identified and valued, the executor may subtract mortgage debt, credit cards, and other liabilities of the estate. The final step is to deduct professional fees and other administrative and funeral costs. The net result is what I would call net assets.
Once you have the final assets, you simply compare this to the estate tax exemption for the given year. The amount that exceeds the federal state exemption will be taxed at 40%.
Congress has been discussing reducing the federal state exemption and increasing the tax rate. So be on the lookout for some changes coming soon.
Strategies to Limit the Pennsylvania Estate Tax
Many people don’t currently have an estate tax problem. But that might not last forever. Estate issues can creep up on you. Make sure you review the following planning ideas with your attorney and CPA:
- Crummey Trusts
- Donor-Advised Funds
- Revocable Grantor Trusts
- Grantor Retained Income Trusts (GRIT)
- Intentionally Defective Grantor Trust (IDGT)
- Minor Trusts
- Special Valuation of Farms and Businesses
- Gifts Below Annual Exemption
- Grantor Retained Unitrusts (GRUTs)
- 529 Plans
- Dynasty Trusts
- Charitable Gift Annuity
- Irrevocable Life Insurance Trust (ILIT)
- Grantor Retained Annuity Trusts (GRATs)
- Qualified Terminable Interest Property (QTIP)
- Charitable Remainder Trusts (CRUT)
- Qualified Personal Residence Trusts (QPRTs)
Estate tax return rules and deadlines
- If your estate is below the exemption, you do not have to file an estate return (except if filing to elect portability).
- You must file Form 706 within nine months subsequent to the date of death. If you cannot file by the deadline, just request an extension. Complete Form 4768 to request an automatic 6-month extension.
- As it relates to portability, the executor may only transfer the “DSUE” to a surviving spouse if Form 706 is timely filed.
Who needs estate tax planning now?
Estate planning is really for everybody. But it is very critical for certain people. If you have high income, a business or are in the following situations you may want to get started:
- Life insurance policies over $1 million
- Large stock, bond, or mutual fund holdings
- Stand to inherit large sums of money
- Significant real estate (rental property) holdings
- Professional occupation and high-earner
- Own a business or are an entrepreneur
- Retirement plan assets over $1 million
Pennsylvania Inheritance Tax and Gift Tax
Some additional good news for you, Pennsylvania does not have a gift tax. The federal government has a gift tax that applies to gifts greater than $15,000 a year.
However, Pennsylvania unfortunately does levy an inheritance tax. It is only one of seven states that levies one.
The tax rate depends on the relationship of the decedent and the beneficiaries or heirs. The tax rate is:
- 4.5% for any asset transfers to lineal heirs or direct descendants;
- 12% for asset transfers to siblings; and
- 15% for asset transfers to other heirs.
Property that is owned jointly between two spouses is exempt from inheritance tax. Property that was inherited from a spouse, or from a child aged 21 or younger by a parent is not taxed. Also, charitable organizations and exempt institutions are tax exempt.
Inheritance tax returns must be filed within nine calendar months after the individual has passed away. The executor is responsible for filing the tax returns. If the individual died without a will, the person who is approved as administrator by the register of wills is responsible for the filing.