Pennsylvania Inheritance Tax

Know Before You Go: Pennsylvania Inheritance Tax and Other Factors When Inheriting a Home in PA

In America the average inheritance received when someone dies is $707,291. So inheriting a friend or relative’s estate could make a huge difference to your life. And inherited property makes up a big part of this figure. 

But did you know that around 30% of people in America blow through their valuable inheritance in a very short span of time? 

A big reason for this is lack of preparation. If you don’t know what to expect when you inherit then you can’t plan ahead. This leads to bad judgment calls and even worse investments.

If you live in Pennsylvania then you need to get in the know about all things inheritance. From probate to Pennsylvania inheritance tax, the more you know, the better prepared you’ll be.

So read on to find out everything you need to know about PA inheritance tax.

How Do You Inherit Property in Pennsylvania? 

Roughly 3 million people die in the US each year and a lot of these people will leave behind a will. This outlines who their estate, including financial gains and property, passes on to. This is the most common way to inherit property.

In order for you to inherit, the will must name you as the sole or joint beneficiary. And it must be valid. 

The deceased must make the will with the help of a lawyer and have it witnessed by two people in order for it to be valid. They must also be of sound mind when signing it.

After someone dies, then their will is examined to ensure that it is legal and valid before the estate passes on. This process is also known as probate. Once the probate officer declares the will valid then the inheritance process begins.

However, you might still inherit property from a deceased relative even if they don’t name you in their will. So let’s take a look at how this works. 

Inheriting Property Without a Will

Whilst being the beneficiary of someone’s will is the most common way to inherit property it isn’t the only way that this happens. If someone doesn’t name you in their will then you might still inherit. This could occur in two ways.

The first way that this can happen is if the deceased hasn’t made a will. Their property still has to pass on so lawyers will start looking for the next legal beneficiary.

The first person on this list is a surviving spouse. If there are no surviving children or parents then they receive 100% of the estate. This doesn’t apply to ex-spouses as the law assumes that the deceased would have disinherited them.

If there are surviving children or parents, the spouse receives 50% and the rest gets divided up between the other beneficiaries. But if there are no surviving spouses, children or parents then the estate passes on through a series of other relatives.

To start with, lawyers will contact descendants such as grandchildren. And if they can’t find them then the estate does to any surviving siblings. If their search still doesn’t show any beneficiaries then they have to look further afield. 

They will contact any surviving nieces or nephews, followed by surviving aunts and uncles. If all this fails then they will look for surviving cousins.

But if your parent does make a will without naming you then you could still inherit. This only works if they made the will before you born and never changed it. In this case, the law assumes that they would have named you in a newer version of the will had they made one.

However, you inherit your property though, if you don’t know what to do next then it might all be for nothing!

Dividing Up Property in Pennsylvania

In some cases, you might inherit a whole estate but a lot of wills feature multiple beneficiaries. When this happens, you have to divide up the assets between you. So let’s take a look at how this works when it comes to property.

Unlike the contents of a bank account, you can’t just split a property into different parts. You can’t give one child the kitchen and another the attic! When it comes to dividing up property between beneficiaries you have a few options.

Firstly, you can sell the property and then divide up the proceeds accordingly. However, you can’t sell a property before probate so you’ll have to wait. Similarly, you could rent out the property and divide the rental income.

Or the beneficiaries might agree to hold onto the property. In this case, you have to agree on what happens next.

Depending on everyone’s living situations you may agree for one beneficiary to move into the property. Or you might keep the home as a shared-property for family holidays. This way you can also share out the maintenance costs on the house.

The last option involves one beneficiary buying out the others so that they take sole charge of the property. This can take a long time and might not make the buying beneficiary much money. However, if you don’t want the hassle of selling the property yourself then this could be the best option for you!

But dividing up the property and receiving your share isn’t the only thing you have to consider when inheriting property. You may also have to pay inheritance and estate tax. So what does this involve? 

What Are Inheritance and Estate Taxes?

To start with, let’s take a look at the basics.

Inheritance and estate tax work like most other taxes. They’re a tax you pay on top of an amount of money when it comes into your possession, just like income. And the amount you pay depends on the amount that you receive.

However, the difference in these two taxes is when you pay them.

You have to pay an estate tax before you receive your inheritance. This means that you can’t inherit without paying the estate tax.

In contrast, you pay inheritance tax after receiving your inheritance. But whether or not you pay inheritance and estate tax depends on which state you live in. This is because different states follow different inheritance laws. 

In Pennsylvania, you don’t have to pay estate tax. But you will have to pay inheritance tax. Let’s take a look at how this works.

How Does the Pennsylvania Inheritance Tax Work? 

While Pennsylvania is one of the 38 states which doesn’t have an estate tax, you do have to pay inheritance tax. The amount of inheritance tax in PA that you pay depends on your relationship to the deceased. 

Inheritance tax in Pennsylvania uses two classes to divide up beneficiaries. Class A includes immediate family such as:

  • Spouses
  • Children
  • Parents
  • Direct descendants (grandchildren etc.)
  • Siblings/Half-siblings

Surviving spouses or children under the age of 21 don’t pay tax on their inheritance. This includes step-children and adopted children.

Anyone who is a direct descendant or lineal heir pays 4.5% inheritance tax. This category includes parents and grandparents, as well as grandchildren. Anyone who falls in this category receives up to $3,500 inheritance tax-free.

Siblings and half-siblings actually fall in their own class -A1 – and must pay 12% inheritance tax. They also don’t receive any form of family exemption. To qualify as a sibling you must share parents, either through blood or through adoption.

All other beneficiaries come under Class B for inheritance and have to pay 15% tax. The only exceptions to this are donations to charities or specific institutions.

Let’s take a look at this in practice then. Let’s say an inherited property is worth $400,000. This is how the tax would break down for different beneficiaries:

  • Spouses, children, charities, etc. receive $400,000 and pay no tax.
  • Parents, grandchildren, etc. receive $400,000. $3,500 is exempt so they pay tax on $396,500. They pay $17,842 tax.
  • Siblings etc. receive $400,000 and pay $48,000 tax.
  • Other beneficiaries receive $400,000 and pay $60,000.

There is also no gift tax in Pennsylvania. This means that while someone is still alive they can gift up to $15,000 without the beneficiary paying tax.

How Do You Pay Inheritance Tax in PA? 

You can pay inheritance tax after receiving your inheritance so you don’t have to pay it to access your inheritance. However, you should keep in mind that there is still a deadline and the probate process can take a while.

You have nine months from the death of the deceased in which to pay your inheritance tax otherwise they will become delinquent. This means that they will start to accrue penalties and interest. You can request an extension but this doesn’t stop interest building up.

If you pay your tax within 3 months of the deceased’s death then you will receive a 5% PA inheritance tax reduction.

You also need to remember that is you sell your inherited property you still might have to pay tax on it. If you make a profit on the property then the state will also tax this profit. But if you make a loss in value then you might get a further tax reduction.

In order to pay your inheritance tax, you have to file PA inheritance tax returns using PA inheritance tax forms. This includes Form REV-1500 for residents and Form REV-1737A for non-residents. In some cases, the estate may file these on your behalf but also check to make sure no one misses submitting this vital paperwork.

Failing to file an inheritance tax return correctly can lead to severe financial penalties.

Federal Estate Tax

There may be no estate tax in Pennsylvania but you might still have to pay federal estate tax. This can be applied in any state across America and depends on the size of the inheritance.

The law currently exempts $11.18 million inheritance. So you can inherit a lot without having to pay tax on it. And the tax rate depends on how much you inherit after exemption.

To understand this better let’s take a look at how this works in practice. Let’s say the deceased leaves behind an estate worth $12 million to their grandchild.

Under Pennsylvania inheritance tax they will have to pay 4.5% tax on £11.99 million. This means they’ll have to pay $539,550 in state inheritance tax. But they’ll also have to pay federal state tax.

$11.18 million is not subject to tax. This leaves $10,000 for tax which the government taxes at a rate of 20% along with a base rate of $1,800. This means they have to pay $2,000 federal estate tax.

So in total, they would pay $541,550. This might sound like a lot but that still leaves them with $11.4 million!

As the amount left after the $11.18 million exemption increases, so do the rate and base rate. For example, an excess of over $1 million is taxed at 40% and the base rate is $345,800.

And remember, this is an estate tax, so the beneficiary has to pay it before receiving their inheritance. This can make things a lot more complicated for people who don’t have funds going spare.

The Bottom Line 

Inheriting property in Pennsylvania can be a complicated process. When it comes to Pennsylvania inheritance tax, the more the immediate family connection, the better the tax breaks. And now that you’re in the know, the process should feel a lot less daunting.

If you need to free up some capital before or after the process it might be tempting to sell a property. If so, be wary of cash-for-houses scams. 

For more help selling or if you have any questions, get in touch today. Or for more information on inheritance laws in other states, check out our blog posts.

 

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