When a loved one passes away in Pennsylvania, families face not only emotional challenges but also complex financial obligations. One of the most significant concerns is Pennsylvania’s inheritance tax, which can substantially impact what beneficiaries ultimately receive from an estate.
At Gieg & Jancula, we help Altoona families navigate the complexities of estate administration and tax planning. Understanding Pennsylvania’s inheritance tax rates and exemptions is essential for both executors managing estates and beneficiaries expecting to receive assets.
What Is Pennsylvania Inheritance Tax?
Pennsylvania inheritance tax is a state-level tax imposed on assets transferred from a deceased person to their beneficiaries. Unlike the federal estate tax, which applies to very large estates (over $13.61 million in 2024), Pennsylvania’s inheritance tax affects estates of all sizes.
This tax is calculated based on the fair market value of the assets transferred and the relationship between the deceased and the beneficiary. The closer the family relationship, the lower the tax rate or the greater the likelihood of exemption.
Pennsylvania Inheritance Tax Rates for 2025
Pennsylvania uses a tiered system based on the beneficiary’s relationship to the deceased. Here are the current rates:
0% Tax Rate (Exempt)
- Transfers to surviving spouses
- Transfers to children under 21 from parents
- Transfers to charitable organizations, religious institutions, and government entities
4.5% Tax Rate
- Transfers to direct descendants (children, grandchildren, and other lineal descendants)
- Transfers to lineal ascendants (parents and grandparents)
12% Tax Rate
- Transfers to siblings (brothers and sisters)
15% Tax Rate
- Transfers to all other beneficiaries, including nieces, nephews, cousins, friends, and unmarried partners
These rates apply to the net value of the property after deducting debts, funeral expenses, and administrative costs.
How Pennsylvania Inheritance Tax Is Calculated
The inheritance tax applies to the clear value of the property received by each beneficiary. The estate executor must file a Pennsylvania Inheritance Tax Return (Form REV-1500) within nine months of the date of death.
Here’s a simplified example: If a father passes away and leaves $200,000 to his adult daughter, the inheritance tax would be calculated at the 4.5% rate for direct descendants. The daughter would owe $9,000 in inheritance tax, receiving $191,000 after tax.
If that same $200,000 were left to a nephew instead, the 15% rate would apply, resulting in $30,000 in tax and leaving the nephew with $170,000.
What Assets Are Subject to Pennsylvania Inheritance Tax?
Pennsylvania inheritance tax applies to most types of property owned by the deceased, including:
- Real Estate: Any real property located in Pennsylvania, regardless of where the deceased lived, is subject to Pennsylvania inheritance tax. Out-of-state property owned by a Pennsylvania resident is not subject to Pennsylvania inheritance tax but may be subject to inheritance or estate taxes in the state where it’s located.
- Bank Accounts and Securities: Savings accounts, checking accounts, stocks, bonds, and mutual funds are all taxable.
- Business Interests: Ownership stakes in partnerships, corporations, and sole proprietorships are included in the taxable estate.
- Personal Property: Vehicles, jewelry, artwork, furniture, and other personal belongings are subject to tax based on their fair market value.
- Retirement Accounts: IRAs, 401(k)s, and other retirement accounts are generally subject to inheritance tax, though specific rules apply.
- Life Insurance: Life insurance proceeds are typically exempt from Pennsylvania inheritance tax if paid to a named beneficiary. However, if the estate is the beneficiary, the proceeds become part of the taxable estate.
Assets Exempt from Pennsylvania Inheritance Tax
Certain assets and transfers are exempt from Pennsylvania inheritance tax:
- Property Owned Jointly with Right of Survivorship: When property is owned jointly with rights of survivorship, the surviving owner automatically receives the deceased owner’s share without inheritance tax. However, this only applies if the joint ownership was established with the joint owner’s own funds.
- Assets in Certain Trusts: Some irrevocable trusts established during the deceased’s lifetime may protect assets from inheritance tax, depending on the trust structure and when it was created.
- Gifts Made More Than One Year Before Death: Property given away more than one year before death is not subject to inheritance tax. However, gifts made within one year of death are considered part of the estate and subject to tax.
- Family Farm Exemption: Pennsylvania offers special exemptions for family-owned farms transferred to qualified beneficiaries who continue farming operations.
The Discount for Timely Payment
Pennsylvania offers a significant incentive for prompt payment of inheritance tax. Estates that file and pay the inheritance tax within three months of the date of death receive a 5% discount on the tax owed.
Using our earlier example, if the daughter owing $9,000 in inheritance tax pays within three months, she would receive a $450 discount, reducing her tax bill to $8,550.
This discount can result in substantial savings, particularly for larger estates. However, gathering all necessary documentation and valuations within three months can be challenging, which is why many families work with experienced estate administration attorneys.
Filing Requirements and Deadlines
The Pennsylvania Inheritance Tax Return must be filed within nine months of the date of death. Extensions may be available in certain circumstances, but interest accrues on any unpaid tax after the nine-month deadline.
The executor or administrator is responsible for filing the return and ensuring the tax is paid from estate assets before distributing inheritances to beneficiaries. Failure to file or pay on time can result in penalties and interest charges.
Common Mistakes to Avoid
- Undervaluing Assets: All assets must be valued at fair market value as of the date of death. Undervaluing property can lead to penalties and additional tax assessments.
- Missing the Three-Month Discount Deadline: The 5% discount represents significant savings. Proper planning and prompt action can help estates capture this benefit.
- Failing to Document Joint Ownership: When claiming the joint ownership exemption, proper documentation showing the source of funds used to acquire the property is essential.
- Not Considering Tax Planning Strategies: Advance planning can help minimize inheritance tax through gifting strategies, trust planning, and proper beneficiary designations.
How Estate Planning Can Reduce Pennsylvania Inheritance Tax
While Pennsylvania’s inheritance tax cannot be completely avoided in most situations, strategic estate planning can significantly reduce the tax burden:
- Lifetime Gifting: Making gifts during your lifetime (more than one year before death) removes those assets from your taxable estate.
- Spousal Transfers: Since transfers to spouses are exempt, leaving assets to your spouse first can defer inheritance tax until the surviving spouse’s death.
- Life Insurance Planning: Properly structured life insurance can provide tax-free liquidity to help beneficiaries pay inheritance taxes without selling estate assets.
- Trust Strategies: Certain trust arrangements can provide tax advantages while maintaining control over how assets are distributed.
Work with Experienced Pennsylvania Estate Planning Attorneys
Navigating Pennsylvania inheritance tax requires careful attention to detail and thorough knowledge of state tax laws. Whether you’re planning your estate to minimize taxes for your beneficiaries or administering an estate and facing tax filing requirements, professional legal guidance is invaluable.
At Gieg & Jancula, we provide comprehensive estate planning and administration services to families throughout Altoona and central Pennsylvania. Our team understands the nuances of Pennsylvania inheritance tax law and can help you develop strategies to protect your family’s wealth.
If you’re concerned about how inheritance tax might affect your estate or need assistance administering a loved one’s estate, contact Gieg & Jancula today to schedule a consultation. We’re here to guide you through every step of the estate planning and administration process.