PA Inheritance Tax Summarized

Pennsylvania is one of 22 states (and the District of Columbia) that imposes an estate tax due after the death of an individual, and is one of only six states that applies an inheritance tax upon residents receiving assets from a decedent or against real estate located here.

With the increased asset thresholds applicable to federal estate, gift, and generation-skipping taxes, which reduce return reporting and tax payments, there is renewed focus on state death taxes. See: Where Not To Die In 2011 -- June Update (06/10/11), by Ashlea Ebeling, and How to Cut Estate Taxes -- Without Moving (07/19/11) by Hani Sarji, both posted by Forbes.

For those seeking a quick overview of the Pennsylvania Inheritance Tax, read the short, official summary that appeared on page 19 in The Tax Compendium (Dec., 2010), issued by the Pennsylvania Department of Revenue.

The cover letter to that report notes its educational use, in the form of a disclaimer: "The Tax Compendium describes the basis, rate and history of Pennsylvania taxes and is intended for research and background information. It is a general guide to Pennsylvania taxes, not a tax manual." 

With that said, here is its useful introductory summary about Pennsylvania "Inheritance and Estate Taxes":

The personal representative of the decedent’s estate or the transferee pays inheritance and estate taxes using proceeds from the estate. The local Register of Wills acts as the Commonwealth’s agent in the collection of these taxes.

The inheritance tax is imposed on the value of the decedent’s estate transferred to beneficiaries by will or intestacy. Certain inter vivos transfers are also subject to inheritance tax. A fractional portion of property held by the decedent and one or more other persons jointly with the right of survivorship is taxable in the decedent’s estate. Specified deductions may be taken in determining taxable estate value.

Inheritance tax is not levied on transfers of assets to certain types of entits. Transfers to governmental entities are exempt. Also exempt are transfers of property to charitable and fraternal organizations when the property is used exclusively for religious, charitable, scientific, literary, or educational purposes. Transfers to qualified veteran organizations are not subject to inheritance tax.

The tax rates levied against estates are based on to whom property is bequeathed. Inheritance tax on the transfer of non-jointly held property to spouses is levied at 0%. The transfer of property from children twenty-one years of age or younger to their parent (either natural, step, or adoptive) is taxed at a rate of 0%. All other transfers to lineal heirs are taxed at the rate of 4.5%. Transfers to siblings (defined as those having at least one parent in common with the decedent, related by blood or adoption) are subject to a tax rate of 12%. Transfers to all other persons are taxed at a rate of 15%.

The estate tax is a pick-up tax imposed to absorb the maximum amount of cedit allowed by federal estate tax law toward state death taxes. For residents, the estate tax represents the difference between the Pennsylvania inheritance tax plus death taxes paid to other states and the maximum federal credit for state taxes allowed by federal estate tax law.

If a resident owned or had an interest in real property or tangible personal property located in another state, the estate tax is reduced by the amount of death taxes paid to the other state or by a proportional amount of the federal credit, whichever is greater.

For nonresidents who owned or had an interest in property located in this Commonwealth, the estate tax is the difference between the Pennsylvania inheritance tax and a proportionate share of the federal credit in the same ratio that the property located in this Commonwealth subject to federal estate tax bears to the decedent’s gross federal estate.

The federal credit upon which the Pennsylvania estate tax is based is phased out between 2002 and 2005. Once the credit is completely phased out, the Pennsylvania estate tax is eliminated. However, estate tax collections will rebound when the federal credit is fully reinstated in 2013.

Inheritance and estate tax payments are due upon the death of the decedent and become delinquent nine months after the individual’s death. If inheritance taxes are paid within three months of the decedent’s death, a 5% discount is allowed. No discount is permitted for estate tax paid within three months of the death of the decedent.

The enabling legislation is Article XXI of the Tax Reform Code of 1971 (P.L. 6, No. 2), as amended, and Chapter 17 of Title 72 (Taxation and Fiscal Affairs), as amended.

For a technical analysis of the underlying law, see the law review article Individuals and Inheritance Taxes: A Praxeological Examination of Pennsylvania’s Inheritance Tax, by Timothy J. Witt, published in the Penn State Law Review, 114 Penn St. L. Rev. 1105 (2010), as noted in PA EE&F Law Blog posting PA Inheritance Tax as Law Review Subject (06/24/10).

The Department offers a few resources online to explain and administer Pennsylvania Inheritance and Estate Taxes, including a general explanation, a "Find Answers" Q&A Section, and official forms, returns, and instructions. The best explanations are found in primary documents -- the Inheritance Tax Return -- Resident Decedent (REV-1500 Form and its Instructions (REV-1501).