Pennsylvania Inheritance Tax is 4.5% on property passing to linear descendants of the decedent and 12% to siblings and 15% to everyone else. IRA accounts, annuities, and “In trust for” accounts, if any, are fully taxable. Joint accounts which were made joint more than one year before death are taxed at one half of value. Life insurance is exempt. There is a 5% discount on inheritance tax for any payments made within three months after death, which reduces the effective rate on gifts to 4.275%. No forms, or final decisions as to value, need be made in order to get the discount. All that is needed is a check, payable to REGISTER OF WILLS, AGENT, which we send in with a cover letter identifying the estate and the rate. Inheritance tax returns must be filed within nine months of death, though a six month extension is virtually automatic, if requested.
A federal estate tax return is required only if the estate exceeds five million dollars for decedents dying in 2011 and 2012. That includes life insurance, if any (with certain minor exceptions), and includes joint accounts at full value. Federal returns include many more formalities, in terms of appraisals and related items.
There is no income tax on inheritances except to the extent that such items represent tax deferred items (such as pension plans, annuities, IRA’s, and accrued E bond interest) or to the extent that they represent income earned after death (there is no inheritance tax on such post-death income). Income tax on such tax deferred items is due by the beneficiaries in the year as they receive the income.
A final federal income tax return for your loved one must be filed, assuming he met the filing threshold, or had federal income tax withheld.
The estate must file a 1041 fiduciary income tax return, if it meets filing thresholds ($600). Normally, rather than result in net taxable income on federal income tax returns, estate returns result in “excess deductions on termination”, which can be divided equally among all the beneficiaries, and used by them as itemized deductions, if they itemize deductions on their personal returns (form 1040). The estate is required, for Pennsylvania inheritance tax purposes, to report all taxable assets, including transfers within a year of death and joint property. If there is any such property, the estate, not the beneficiary, pays the inheritance tax on it, but the beneficiary pays the income tax, if there is any taxable income in the item in question.
If there are U.S. Savings Bonds, the significant factors are: (a) The turnover date; and (b) Income Tax on accrued interest. “The turnover date” means, essentially, that since bonds increase in value every six months, there is a loss of up to five months interest if cashing is not made in one of the two months in each year in which value increases. There are three choices with respect to reporting accrued interest on Savings Bonds: (1) Report it on the decedent’s final return (form 1040); if he owes no tax, even with the interest included, this is the clear choice; (2) Report it on the estate’s return (if this is done, timing of estate deductions, such as fees, should be watched to get the maximum advantage of offsetting such items against bond interest); or (3) Transferring the bonds without cashing (rarely recommended).
Individual Retirement accounts or IRA’s have special rules. Essentially, if there is a named beneficiary, then the beneficiary should consider the possibility of electing to stretch the pay-out over his or her own life expectancy. The beneficiary can still elect, later, to withdraw the entire balance. This has substantial income tax advantages, but must be elected by the end of year.
Real estate, like stock, takes a “fresh start basis” at death, so that original cost to your father is not relevant for income tax (capital gains tax) purposes. If you decide to sell a house and do not need the aid of a real estate agent to find a buyer, we can handle all the paperwork from the agreement of sale to settlement, for an additional fee. If you do not sell the property in the nine months after the date of death we can value the property using the common level ratio. If you decide to make the house you inherit your primary residence there is no federal income tax due if you later sell it if your gain is less than $250,000 if you are single and $500,000 if you are married filing jointly.
No Inventory of furniture and personal effects is required under the Pennsylvania Inheritance tax laws. The Pennsylvania inheritance tax return is due nine months from death. There is no difficulty in getting a six month extension, if desired, which it rarely is unless there are problems in selling the house.
You should keep receipts for the following expenses which are deductible on the PA Inheritance Tax Return and the PA final fiduciary return:
- Funeral costs including luncheon and head stone;
- Attorney, Accounting and Appraisal fees and Real Estate Commissions;
- Final medical bills;
- Final utility bills including cable, internet, telephone, gas and electric;
- Costs incurred to sell assets of the estate including real estate taxes and property insurance;
- Probate Fees paid to the Register of wills;
- Probate publication fees;
- Executor Travel Expenses;
- Cost of a Posting a Bond;
- Debts of the Decedent;
- Federal and Pa Income Tax paid with final income tax returns.
Contact Spadea & Associates, LLC at 610-521-0604 if you need help administering an estate or find yourself being appointed as an Executor.
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