A major area of misinformation and misunderstandings in the estate law and estate planning areas are the taxes that are imposed upon one’s death in Pennsylvania.
Very simply, two death taxes can be imposed on the death of Pennsylvania residents – the:
- Federal Estate Tax
- Pennsylvania Inheritance Tax
However, and unlike the income tax, which is very descriptive in its title as it is imposed upon your income, the phrases Estate Tax and Inheritance Tax are misnomers in that may tend to belie the actual fact that these are taxes imposed by virtue of your death.
The Federal Estate Tax
Historically, the Federal Estate Tax has begun at a wealth threshold. If you possess less than the wealth threshold at your death, the federal estate tax will not be applicable.
If it is applicable, the tax is imposed on a percentage scale according to the amount of your wealth (i.e., potentially 47% of the value of your assets above the wealth threshold).
The current wealth threshold of the Federal Estate Tax has been changing drastically throughout the last decade. It has increased, disappeared, and reappeared in 2011.
In 2005, the threshold was $1,500,000.00; in 2006, 2007, and 2008, the threshold was $2,000,000.00; in 2009, the threshold was $3,500,000.00; and in 2010, the Federal Estate Tax was scheduled to be, and in fact was, eliminated.
However, and although the Federal Estate Tax was scheduled to return with a wealth threshold of just $1,000,000.00, in 2011, it did not. The Internal Revenue Service changed that law and “announced the 2015 estate and gift tax limits […] and the federal estate tax exemption rises to $5.43 million per person, and the annual gift exclusion amount stays at $14,000.” “IRS Announces 2015 Estate And Gift Tax Limits”
The federal estate tax exemption—that’s the amount an individual can leave to heirs without having to pay federal estate tax—will be $5.43 million in 2015, up from $5.34 million for 2014. That’s another $90,000 that can be passed on tax-free. The top federal estate tax rate is 40%.
The Pennsylvania Inheritance Tax
The Pennsylvania Inheritance Tax has no wealth threshold and starts immediately. It is imposed on a percentage based on the relationship of the beneficiary. Spouses and Charities are taxed at a 00.00% tax rate, lineal descendants are taxed at a 04.50% tax rate, brothers and sisters (but not brothers-in-law nor sisters-in-law) are taxed at a 12.00% tax rate, and everyone else is taxed at a 15.00% tax rate.