Ask the Adviser: How do I handle the taxes on inheritance from a PA resident? - Rodgers & Associates

Ask the Adviser: How do I handle the taxes on inheritance from a PA resident?

Q: I recently received an inher­i­tance from a family member who was a Pennsyl­vania resident. How do the taxes work?

When a family member or friend passes away, it can be an emotionally draining time, and calcu­lating potential tax liability is the last thing anyone wants to figure out. If a Pennsyl­vania resident has left something to you, however, it’s important to under­stand the tax impli­ca­tions within a timely manner.

To start, you won’t have to pay any federal estate tax unless the total assets you’ve inherited are worth more than $12.92 million in 2023 (the amount is double for a married couple). That figure rises to $13.61 million in 2024.

At the Pennsyl­vania state level, there aren’t estate taxes, either, but there is inher­i­tance tax.

To determine how much inher­i­tance tax you need to pay, you’ll first need to learn the value assigned to what you’ve inherited. Your estate attorney should be able to provide guidance on this process. Then you’ll determine the rate at which that value is taxed, which depends on your relationship to the deceased. These tax rates, desig­nated by the receiver, are as follows:

  • 0% for spouses or kids under age 21
  • 0% for charity
  • 4.5% for kids and grandkids (all lineal heirs; this could also apply to assets inherited by a parent from a child)
  • 12% for siblings
  • 15% to anyone else

The tax is required to be paid within nine months, and if it’s paid within three months, a five percent discount applies. This is done by filing an inher­i­tance tax return—a stand­alone return that’s commonly filed with the help of an estate attorney.

If the deceased individual has named a personal repre­sen­tative, or executor, in their will, then that person will file the return. If there isn’t a repre­sen­tative or admin­is­trator, then you will file the return (and pay the tax) as the person receiving the property.

If the asset you’ve inherited is an IRA, there’s an exception to be aware of: If the person who passed on the account died before turning 59 ½, then the benefi­ciary doesn’t need to pay the tax. Life insurance on the life of the deceased also isn’t subject to inher­i­tance tax, as long as it’s not an annuity.

For the most current laws and how they might apply to your situation, we recommend contacting an estate lawyer. Additionally, there is helpful infor­mation on the PA Department of Revenue’s website, including the Inher­i­tance Tax Return for a Resident Decedent (REV-1500) form.