The Truth About the Federal Death (Estate) Tax and Pennsylvania Inheritance Tax
A 40% Death tax!? Then add on Pennsylvania inheritance tax! More people ought to be concerned about the prospect of paying up to 40% Federal Estate Tax on their assets when they pass away. However, rest easy knowing that a 40% levy on your assets upon your death is unlikely to occur.
The vast majority of people in the Commonwealth of Pennsylvania, and the United States for that matter, shouldn’t be concerned about paying any Federal Estate tax. Why? Because the Federal exemption defined in the IRS’ Estate and Gift Tax Limits for 2019 is $11,400,000. So what does that mean to me?
Essentially, it means you will not pay any federal estate tax on the first $11,400,000 in gifts or estate. The $11,400,000 million exemption can be used during your lifetime as a shield from gift taxes and upon your passing as a shield from estate taxes. The Federal Estate and Gift Tax Exemption is limited to $11,400,000 million, which means you may use the exemption several times during your lifetime and upon your passing, but the total gifts cannot exceed the $11,400,000 million to avoid the Federal Estate and Gift Tax. I liken this to a large bucket of water that a person can dip into as he or she deems appropriate, but once it is empty, you can’t fill it up again.
Now, that is not the same story in Pennsylvania. The Pennsylvania Inheritance Tax (PIT) is levied on the assets of all Pennsylvania residents and any person that owns property in Pennsylvania. After a Pennsylvania estate is administered and appropriate creditors are paid, the value of the net proceeds payable to the beneficiaries are used to calculate the Pennsylvania Inheritance Tax at the following rates:
Beneficiary: Tax Rate:
Lineal descendants and ascendants 4.5%
Non-family and extended family (including nieces/nephews) 15%
First, transfers from spouse to spouse are not taxable under Pennsylvania’s inheritance tax. Let’s get that out of the way. After spouses, the above rates are applicable. While a 0-15% Pennsylvania Inheritance Tax is less than appealing, it pales in comparison to the threat of a 40% Federal Estate Tax that most Pennsylvanian’s won’t ever encounter. Since no one wants to pay unnecessary taxes, there are several considerations that must be taken into account when deciding whether it is in your or your beneficiary’s best interest to avoid the Pennsylvania Inheritance Tax by gifting or converting them to non-taxable assets. In many instances, paying Pennsylvania’s Inheritance Taxes can result in a significant Federal Income Tax savings for your beneficiaries in their future.
It’s complicated. We get it. The best thing you can do to get answers is to contact Mooney Law to schedule an appointment to evaluate how to properly plan for Federal Estate and Pennsylvania Inheritance Tax as part of a comprehensive estate plan. Call Mooney Law at 833-MOONYLAW or 717-200-HELP to schedule a consultation at one of our 16 office locations.