Pennsylvania Inheritance Tax
Pennsylvania collects inheritance tax when property is left to people who weren’t closely related to the deceased person.
Pennsylvania collects an inheritance tax when property is left to people who weren’t closely related to the deceased person. The tax rate depends on how closely the inheritors and deceased person were related—the closer the family connection, the lower the tax rate.
The inheritance tax is imposed when property is left by:
- a Pennsylvania resident, or
- a nonresident who owned real estate or tangible property located in the state.
Special Exemptions for Farms and Businesses
The Pennsylvania legislature has carved out inheritance tax exceptions for certain kinds of property. Farmland is exempt from inheritance tax, as long as the land is inherited by family members and continues to be used for agriculture for seven years. (72 Pa. Cons. Stat. Ann. section 9111, effective for deaths as of July 2, 2012.) Small family-owned businesses (those that have fewer than 50 employees and assets valued at less than $5 million) are also exempt from inheritance tax, if they have been in existence at least five years, are inherited by family members, and stay in operation for another seven years. (Act 52 of 2013, effective July 9, 2013.)
Inheritance Tax Rates
Every person or organization that inherits property is put into a group for Pennsylvania inheritance tax purposes. This classification determines the tax rate that is applied to the value of the inherited property.
Several categories of beneficiaries pay no inheritance tax:
- The surviving spouse of the deceased person
- Parents or stepparents who inherit from a child who was 21 or younger
- Charitable organizations and government entities
Pennsylvania currently does not exempt same-sex surviving spouses who were legally married in another state. This policy is being challenged in court by two women who were assessed inheritance tax on what they inherited from their same-sex spouses.
Class A heirs include:
- Lineal descendants, which means children and their descendants (whether or not they have been adopted by others) and step-descendants
- Parents and grandparents
- The spouse of a child
- If a child is deceased, that child’s surviving spouse, if he or she has not remarried
Members of Class A pay a 4.5% inheritance tax on what they inherit.
Siblings, including half-brothers and sisters, who are related by blood or adoption pay a 12% tax rate.
All other inheritors are in Class B and pay the collateral tax rate, which is currently 15%.
Filing the Inheritance Tax Return
The Pennsylvania inheritance tax return (Form REV-1500) is available on the Pennsylvania Department of Revenue website and can be filled out online. (It must be printed out and signed, however, before it’s filed.) The executor or administrator in charge of the estate (or the trustee, if there’s a trust) is responsible for filing the return. Just one return is necessary, even if several people owe tax. The return is filed with both the Pennsylvania Department of Revenue and with the Register of Wills in the county where the deceased person lived.
The tax return is a complicated document, with lots of schedules where the deceased person’s property and liabilities are listed. And different tax rates may apply to different inheritors. Executors will almost certainly need expert help and advice from an experienced local attorney.
The executor pays the tax from estate (or trust) assets before property is distributed to the inheritors. If there isn’t a court-appointed personal representative, then someone who receives money outside of a will or trust—which means that the executor of the estate (or trustee of the trust) doesn’t control the process—must file the tax return and pay any tax due.
The return and payment are due nine months from the date of death, and late payments may trigger a penalty. The state will grant requests for an extension of time in which to file the return, but the tax must still be paid by the original due date. If it’s paid early, within three months after the death, you can take five percent off the total bill.