If you have a relative who dies in the Commonwealth of Pennsylvania (for PA does call itself a commonwealth, not a state) and leaves you money or property, you may be assessed an inheritance tax in addition to any estate tax. However, if your deceased relative didn't live in Pennsylvania, you will only be assessed PA inheritance tax if the property you inherited is physically located within the commonwealth.
Pennsylvania does assess an inheritance tax on all property inherited from a PA resident, as well as on all inherited property located within Pennsylvania. If your relative lived in a different state but left you property located in Pennsylvania, the inheritance tax will apply, even if neither of you lived in Pennsylvania at the time. Inheritance tax is in addition to estate tax, which may also be assessed.
What Is Inheritance Tax?
Inheritance tax is a creature of state law; the IRS does not assess inheritance tax. Only six states impose an inheritance tax: Pennsylvania, Nebraska, Iowa, Kentucky, New Jersey and Maryland. Inheritance tax is a tax imposed upon a person who inherits money or property, and it's usually a percentage of the value of the property inherited. For example, if your state assesses a 10 percent inheritance tax, and you inherit $1,000, you would be responsible for a tax of $100.
Who Pays Inheritance Tax?
Inheritance tax is the responsibility of the heir who receives the inheritance, although the tax itself is likely to come from the inherited property, just as estate tax would. If the property you inherited is located in Pennsylvania, or your deceased relative was a Pennsylvania resident, the tax applies even if you don't live in Pennsylvania yourself.
Pennsylvania Inheritance Tax
Pennsylvania is one of the six states that impose an inheritance tax. How much tax you pay will depend upon your relationship to the decedent. For 2018:
- If you inherit from your spouse, the tax is 0 percent.
- If you're 21 years old or younger, and you inherit from a parent, the tax is 0 percent.
- If you are a "lineal heir" of your deceased relative (i.e., the relative is a parent and you're over 21, or the relative is a grandparent or great-grandparent, and so on), the tax is 4.5 percent.
- If you inherit from a sibling, the tax is 12 percent.
- All other inheritances are imposed a 15 percent tax (except if the heir is a charity, a tax-exempt institution or a tax-exempt government entity).
The tax is assessed on the amount leftover after certain allowed deductions are subtracted from the gross estate. These deductions can include funeral costs and the debts of the decedent. For example, if your sister leaves you a house worth $400,000 located in Pennsylvania, but the house has a mortgage of $350,000, the 12 percent sibling inheritance tax would be assessed against the $50,000 net value.
Inheritance Tax for PA Residents
Pennsylvania inheritance tax only applies if your deceased relative was a Pennsylvania resident, or if the property is tangible property located in Pennsylvania. So, if your relative lived in Pennsylvania, any property left to you (if not exempt from the tax for other reasons) would be subject to the tax.
Inheritance Tax Property Types
The PA inheritance tax applies to all tangible property bequeathed by a Pennsylvania resident that is located in Pennsylvania. Tangible property includes things like real estate, cars, furniture and other physical items. Tangible property must be located in Pennsylvania to be subject to the tax, even if your relative was a Pennsylvania resident.
Intangible property, on the other hand, is taxable wherever it's located. Intangible property includes things like bank accounts and stocks and bonds. If your relative was a Pennsylvania resident and left you intangible property, that inheritance is taxable no matter where it's kept. For example, if your cousin was a Pennsylvania resident and leaves you a $5,000 investment account kept at a bank in Kentucky, that property would be subject to the tax even though it isn't located in Pennsylvania, because he was a resident of Pennsylvania and it is intangible property.
Inheritance Tax From Non-Pennsylvania Residents
If your relative was a resident of a different state, and left you tangible property located in Pennsylvania, the tax will still apply, even if neither of you live in Pennsylvania. However, intangible property located in another state is not taxable if your relative was a resident of a different state, even if you live in Pennsylvania.
Say your cousin from the previous example was a resident of Kentucky and left you that $5,000 Kentucky investment account. Even if you live in Pennsylvania, inheritance tax would not apply because the decedent was not a resident (although Kentucky has its own inheritance tax, so you may have to pay an inheritance tax regardless). On the other hand, if he lived in Kentucky and left you a hunting cabin in Pennsylvania, you'll have to pay the Pennsylvania inheritance tax on the value of the cabin.
Pennsylvania Inheritance Tax Exceptions
If you own any property jointly with your spouse, that property is exempt from inheritance tax. Additionally, for relatives who passed away after June 30, 2012, certain types of farmland and other agricultural property, including forest reserves, may be exempt. This only applies if you inherit from a lineal relative or a sibling, or if certain requirements for a family farm used in the business of agriculture are met.
When Are the Taxes Due?
Inheritance taxes in Pennsylvania are due within nine months of your relative's death. But if you pay them within three months after she dies, you may get a 5 percent discount. However, if you don't pay them within nine months after she passes away, the Department of Revenue will deem them delinquent and may assess penalties in addition to the tax.
Estate Tax Vs. Inheritance Tax
You may have heard of estate tax in addition to inheritance tax, and you may have heard them used interchangeably. However, they are different taxes. The federal government assesses estate tax on inheritances over a certain size, depending on how much the decedent gave away in his lifetime. Some states also assess their own separate estate tax on top of the federal estate tax, and the federal estate tax is separate from any inheritance tax.
PA Estate Tax Vs. Federal Estate Tax
Pennsylvania does not assess its own separate estate tax; it only assesses the inheritance tax. In fact, of the six states that do have an inheritance tax, only Maryland also assesses an estate tax. If you inherit money or property in Pennsylvania, the federal estate tax will only come into play if your deceased relative died in 2018 and gave away more than $11.18 million during his lifetime (calculated only to the extent that his annual gifts to a single person exceeded that year's limit, which was $15,000 for 2018 but was lower in prior years).
Federal Estate and PA Inheritance Taxes
If your uncle leaves you his entire estate of $15 million after he dies in 2018 and he never gave away any of his money while he was alive, the estate would have to file a federal estate tax return, and the IRS would assess an estate tax against $3.82 million, which is the difference between the inheritance and the estate tax minimum of $11.18 million. The estate is responsible for this tax.
If that entire $15 million estate is located in Pennsylvania, you personally will have to pay the Pennsylvania inheritance tax. Since he is your uncle, you are not a lineal heir, and so the tax would be 15 percent of the net amount after allowed deductions.
- Pennsylvania Department of Revenue: Inheritance Tax
- Merriam-Webster: What's the Difference Between a Commonwealth and a State?
- The Tax Foundation: Does Your State Have an Estate or Inheritance Tax?
- Pennsylvania Department of Revenue: Informational Notice Inheritance Tax 2012
- IRS: Estate Tax
- IRS: Frequently Asked Questions on Gift Taxes
- Montgomery County Tax Claim Bureau: Inheritance Tax for Pennsylvania Residents
- Pennsylvania Department of Revenue: Instructions for Form REV-1500