Benjamin Franklin once wrote in a 1789 letter, “…in this world nothing can be said to be certain, except death and taxes.” This bit of wry humor is true, of course. And in our modern time, we’ve figured out how to combine those certainties with what are commonly known as “death taxes.”
As with most things today, the term “death taxes” is politically charged – the name was devised (likely in the 1990s) to describe estate and inheritance taxes by opponents looking to have those repealed. Unfortunately, their efforts were unsuccessful, but the morbid name stuck.
What exactly are death taxes?
Any tax imposed on property or monetary transfers to beneficiaries after an individual has died is labeled a death tax. The name is a catch-all for two specific types of payments due, however.
Levied by the federal government and a few state taxing authorities (though NOT Pennsylvania at this time), estate tax is due before any assets are distributed.
As we discussed in a previous blog post about probating estates in PA, estates with taxable assets under $11,180,000 are not subject to the Federal Estate Tax, and no return needs to be filed. For larger estates that exceed the threshold, Form 706 must be filed with the IRS.
While the federal government does not impose an inheritance tax today, several states require individuals who inherit a friend or family member’s property or money to remit a percentage of the asset’s value. The Commonwealth of Pennsylvania is one of these taxing states, and the rates break down like this:
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- Parent to Child: 4.5%
- Sibling to Sibling: 12%
- Everyone Else: 15%
- Spouse to Spouse and Estate to Charitable Organizations: 0%
If you are probating an estate in Pennsylvania, it will be up to you to assure that the inheritance taxes are paid within nine months of your friend or family member’s death date. There is a 5% discount if the taxes are paid within three months.
Don’t forget about final income taxes
While these taxes aren’t categorized as death taxes, federal and state income taxes are due for the deceased individual by April 15th in the calendar year following that person’s death date. In that same previous blog post we mentioned earlier, we advised that these returns cover the period between January 1st of the tax year through your friend or family member’s death date, and if you are in charge of probate, you will need to remember to file these returns.
Per the IRS instructions on filing final returns on behalf of a deceased person, “All income up to the date of death must be reported, and all credits and deductions to which the decedent is entitled may be claimed.” This is true for both federal taxes and those remitted to Pennsylvania’s Department of Revenue.
The estate actually becomes a separate taxpayer on the day after death through the end of the death year, and “fiduciary” income tax returns may also be required. If you are confused about what returns need to be filed, seek out the expertise of an experienced tax preparer, or consult with a knowledgeable probate and estates attorney.
MHG is here to help
If you’ve begun the probate process on your own and have run into difficulty, or you simply need some expert advice on estate and inheritance tax matters, we’d love to offer you a free phone consultation. May, Herr & Grosh has been assisting families in Lancaster County and beyond with estate planning, estate administration, and will contest cases for three generations.