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Two types of taxes can affect the estates of Pennsylvania residents - Pennsylvania’s inheritance tax and the Federal estate tax. The two taxes work in very different ways. Some assets are subject to one tax but not the other. The rates of tax are very different. Pennsylvania imposes an inheritance tax on most assets of a deceased Pennsylvania resident, after allowed deductions like debts, funeral expenses and costs of an estate’s administration are subtracted.
Some assets are not subject to inheritance tax. These include property owned jointly by a husband and wife and life insurance. If a deceased person owned an asset jointly with one other person, only one-half of the value of that asset will be subject to tax if held for more than one year.
Rates of Pennsylvania inheritance tax are much lower than are those of the Federal estate tax. There is no tax on property which passes to a surviving spouse or is distributed to a charity. The rate of tax on assets passing to children is 4.5%. The rate on assets passing to parents, grandchildren or grandparents is 4.5%. The rate on property passing to a brother or sister is 12%, and the rate of tax on property passing to cousins, friends, aunt, uncle or others is 15%.
The Federal estate tax does not involve all estates. It effectively exempts a certain amount of a person’s estate - in 2005, the amount is $1.5 million. This exempt amount will increase to $3.5 million for persons who die in 2009.
If a person dies having assets valued at less than the effective exemption amount, it is not necessary to even file a Federal estate tax return. If assets exceed the amount, a return must be filed. Tax is imposed only on that part of a “net estate” which exceeds the exemption amount.
So if a person has assets in excess of the exemption, but allowed deductions reduce the value of the estate below the exempt amount, a return is filed but no tax would be due.
For Federal estate tax purposes, some assets are included in a person’s estate that are not included in an estate for Pennsylvania inheritance tax purposes. Two examples are one-half of the property owned by the decedent and his or her spouse and the value of benefits under individual life insurance policies owned by the decedent.
While a deceased spouse’s one-half share of property owned jointly is included as an asset on the Federal estate tax return, a deduction is allowed for all property which passes to the surviving spouse. This delays until a later time taxation of the assets.
The rates of Federal estate tax are much higher than are those of Pennsylvania inheritance tax. Tax is 45% on that part of the estate in excess of the exempt amount, and the rate increases to 47% on very large estates.
Returns for both the Pennsylvania inheritance tax and Federal estate tax must be filed within 9 months after a person’s death.
Both of these taxes involve complicated returns. On each, all taxable assets must be reported, and failure to take advantage of available deductions can result in too much tax being paid. You should seek professional help in preparing these documents.
If you need an attorney and don't have one, the Lawyer Referral and Information Service can help.
Call Us Monday - Friday from 8:30 AM - Noon and 1:15 PM - 3:00 PM
at (814) 459-4411.