January 31, 2023

When reviewing taxes for a discount customer, I sometimes hear the comment, “You told me the tax rate was 4.5%. Why is that different?” The inheritance rate under the Pennsylvania estate tax for children, grandchildren and other “direct” descendants is 4.5%. If the beneficiary is a brother or sister of the deceased, it is 12%. If it’s a more distant relative or friend, it’s 15%. But these are just some of the problems that arise.

Some assets such as B. Proceeds from life insurance are not taxable for inheritance tax purposes. Inheritance tax for a spouse is 0%. Out-of-state real estate is not subject to inheritance tax in Pennsylvania, but real estate in Pennsylvania is subject to it, even if owned by a non-resident. Vacation real estate in Pennsylvania owned by a Pennsylvania resident is taxable for Pennsylvania estate tax purposes.

This only affects inheritance tax in Pennsylvania. There are other taxes which may be relevant by other jurisdictions or for other reasons which also need to be considered both in the ordinary course of business and sometimes in connection with inheritance.

A beneficiary who inherits an IRA that belonged to a Pennsylvania resident may receive the IRA in a “trustee-to-trustee transfer” and the IRA becomes what is known as a “beneficiary IRA” for the new owner but the IRA -Value is still subject to Pennsylvania inheritance tax unless received by a spouse or the decedent was under 59½ years of age at the time of death or falls into another category such as B. a disability.

If the beneficiary redeems a traditional IRA, deferred federal taxes are payable.

If a Pennsylvania testator leaves an out-of-state property, such as For example, a beachfront home in New Jersey or Delaware, is there an out-of-state tax? Reference would need to be made to the laws of that jurisdiction but if you are a close surviving relative probably not, although that might depend on value.

It’s not hard to see that these interconnected concepts can get complicated.

What about federal taxes? Note that the inheritance is not income for federal or state income tax purposes.

What about the state estate and gift tax? For 2023, the federal estate and gift tax will not tax estates for individuals that are less than $12.92 million. In transferability, if the decedent was married, the unused balance may be transferred to the decedent’s spouse, who also had the $12.92 million tax exemption. It is estimated that less than 0.1% of Americans are subject to the tax, and of those, they only pay in excess of $12.92 million. Spouses have an unlimited spousal deduction. So the federal estate tax is unlikely to affect you.

What about the gift tax? State estate and gift taxes are cumulative, so taxpayers are required to file a gift tax return if they donate more than the “annual cut-off amount,” which is currently $17,000 per recipient for 2023. The government only considers the amount per recipient over $17,000 in determining whether your estate has achieved the $12.92 million death exemption. That too is easy to overcome. If you are living husband and wife and each of your children $17,000 ($34,000) per year and also each of your grandchildren etc. Gift Tax Return. However, there may be other reasons for submitting such a return, e.g. B. If you and your recipient want to know the “basis” of the gift at the time of the transfer. Gift tax rules apply not only to cash or cash equivalents, but also to homes, businesses and other assets, and this information can be important. An experienced accountant or financial planner in this field could help.

Crucially for those confronted with nursing homes, the $17,000 state gift tax exemption has absolutely nothing to do with Medicaid gift rules. A structured Medicaid gift program may display either more or less than the gift tax exemption, and the Medicaid exemption is not related to the gift tax rules. However, gift-giving errors here, if made without specialized qualified assistance, can have significant consequences in terms of Medicaid penalties.

JAnet Colliton, Esq. is a Certified Elderly Attorney recognized by the American Bar Association and the Pennsylvania Supreme Court, practicing exclusively in the areas of elder law, retirement, special needs, estate planning and estate administration with offices at 790 East Market St., Suite 250, West Chester , 610-436-6674, [email protected] She is a member of the National Academy of Elder Law Attorneys and, along with Jeffrey Jones, CSA, co-founder of Life Transition Services LLC, a service for families with long-term care needs.

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