As a family is dealing with grief over the death of a loved one, they are also dealing with what the deceased left, good or bad, including the finances, the investments, real estate, and the bills. Although dividing these things up among beneficiaries can be a painful process, taxes on the assets are rarely levied on the federal level and for close relatives in Pennsylvania, not at all or minimally. That said, there are many who may be named in the will of a deceased Pennsylvanian who may face taxes for that inheritance.
Federal taxes on the estate of a deceased person are rare for most Americans and mainly targeted to estates of considerable value. The federal estate tax, which ranges from 18 to 40 percent, applies to assets of over $12.06 million in 2022, according to the Internal Revenue Service.
However, at the state level, there is an estate tax in over a dozen states and Washington, DC. Pennsylvania is one of the jurisdictions that does so. The state joins Iowa, Kentucky, Nebraska, Maryland, and New Jersey in assessing fees for the property and assets left by a deceased person to their loved ones.
What Inheritance Is Taxable in Pennsylvania?
Although there are many things that a person may leave to their loved ones on their death, many of these items may be meaningless to someone outside the family, or for market value. The photograph of your grandparents’ wedding, for example, is not likely to be sold, nor is the baseball trophy from your father’s high school.
What will be taxed in Pennsylvania includes the following:
- Tangible property. Includes real estate, cars, cash, furniture, antiques.
- Intangible property. This includes stocks, bonds, loans, receivables, business interests, and bank accounts.
How You Are Connected to the Deceased Matters?
Beginning in January 2011, the estates of decedents survived by a spouse are allowed to pass on unused exemptions to the surviving spouse, a tax break referred to as the unlimited marital deduction. However, when that surviving spouse dies, the children of the couple may have to pay taxes on that estate.
Beneficiaries who are not the surviving spouse may be assessed with taxes.
Although the federal taxes are rare on estates under the bar set by the IRS each year, beneficiaries in Pennsylvania may be assessed for inheritance. However, the closer the family connection, the lower the tax rate. Here are the current rates for Pennsylvania inheritance taxes:
- For a spouse or child under the age of 21: 0 percent.
- For direct descendants: 4.5 percent.
- For siblings: 12 percent.
- For other heirs: 15 percent.
- Note that assets left to charitable organizations, non-profits, exempt entities, and government organizations are not included in this 15 percent estate tax category.
Ways to Reduce the Tax Burden
If a person inherits an asset that drops significantly in value after receiving it, one possible way to reduce the estate taxes owed on the asset is to choose a valuation date six months after the date of death.
Thinking of the dramatic drop in value of items such as a car after the car has been sold, shifting the valuation date out by six months could make a valuable difference for the beneficiary.
Some beneficiaries may be inheriting something they do not want or need and decide to sell that asset. This method will not escape taxation. Capital gains tax will be charged on the product sold. Because inherited property is considered to have a holding period of greater than one year, that sold asset is designated as long-term capital gains or losses for tax purposes. When assets are held for less than one year, they are taxed at the normal income tax rate, which is usually more favorable.
Media Wills and Estates Lawyers at Eckell Sparks Help Families Handle the Death of a Loved One
On the death of a loved one, family members are in the unfortunate position of both grieving for the deceased and taking care of what is left behind. The Media wills and estates lawyers at Eckell, Sparks, Levy, Auerbach, Monte, Sloane, Matthews & Auslander, P.C. are sympathetic to the tremendous loss families suffer from following a death, and they are experienced in using state and federal laws to help the surviving loved ones. Call us at 610-565-3701 or contact us online to schedule an appointment. Located in Media and West Chester, Pennsylvania, we serve clients throughout Delaware County, Chester County, and Montgomery County.