You've just learned that you're inheriting assets from a loved one who recently passed. Between grief and paperwork, someone mentions "inheritance tax" and suddenly you're wondering how much of that inheritance you'll actually receive. Pennsylvania is one of five states that still impose an inheritance tax on most estates, and the amount you'll owe depends entirely on your relationship to the person who died.
A Paoli probate lawyer can help executors and heirs understand these tax obligations before they become financial surprises. Whether you're inheriting real estate, retirement accounts, or personal property, knowing Pennsylvania's estate tax rules helps you plan for what's ahead and avoid penalties for missed deadlines.
Does Pennsylvania Have an Estate Tax or an Inheritance Tax?
Pennsylvania doesn't have an estate tax; it has an inheritance tax. An estate tax is calculated on the total value of everything the deceased owned and is paid by the estate before distributions. An inheritance tax is calculated on what each beneficiary receives and is paid by that beneficiary, though executors usually handle payment from estate funds.
Pennsylvania's inheritance tax applies to property transfers from deceased persons to their heirs. The tax rate depends on the beneficiary's relationship to the decedent, not the estate's size.
Who Pays Inheritance Tax in Pennsylvania and at What Rate?
Pennsylvania's inheritance tax creates a tiered system based on family relationships:
- Surviving spouses are completely exempt at 0% on all transfers from a deceased spouse.
- Parents inheriting from children aged 21 or younger are exempt at 0% on transfers from their child.
- Children aged 21 or younger inheriting from parents are exempt at 0%.
- Charitable bequests in a will are exempt, along with transfers to qualifying religious, educational, and governmental entities.
- Lineal heirs, including children, grandchildren, and their spouses, among others, generally pay 4.5% on taxable transfers.
- Siblings pay 12% on their inheritance.
- Other heirs pay 15%, including nieces, nephews, cousins, friends, and unmarried partners.
The rates apply to the net value after estate debts and expenses are paid.
What Assets Are Subject to Pennsylvania Inheritance Tax?
Pennsylvania inheritance tax applies broadly to most property transfers at death.
- Real estate located in Pennsylvania is always taxable, even if the deceased lived elsewhere.
- Bank accounts, investment portfolios, business interests, vehicles, jewelry, and household goods all fall under the tax.
- Jointly owned property with right of survivorship is taxable on the decedent's interest when passing to non-spouses.
- Life insurance proceeds paid directly to a named beneficiary are generally exempt.
- Retirement accounts like IRAs and 401(k)s are generally taxable in Pennsylvania, though specific rules depend on factors including the decedent's age at death and the type of retirement account.
Resident vs. Nonresident Rules
Pennsylvania's inheritance tax reaches beyond state borders in specific ways. Nonresidents who own Pennsylvania real estate or tangible personal property located in Pennsylvania owe inheritance tax on those assets when they die. A New Jersey resident who owns a vacation home in the Poconos creates a Pennsylvania inheritance tax obligation for heirs inheriting that property.
Intangible assets of nonresidents, like bank accounts, stocks, and bonds, are not subject to Pennsylvania inheritance tax. A Florida resident's investment portfolio passes to heirs without Pennsylvania tax, even if some investments were managed by a Pennsylvania firm.
Joint Ownership Beyond Spouses
Joint tenancy with right of survivorship (JTWROS) allows property to pass directly to the surviving owner without probate, but it doesn't automatically avoid inheritance tax. When non-spouses own property jointly, Pennsylvania generally taxes only the decedent's fractional ownership interest.
Joint property is taxable even if the decedent's name was added only as a matter of convenience, such as adding an adult child to an elderly parent's bank account to help with bill paying. The tax applies based on the survivor's relationship to the deceased.
Only the fractional ownership interest is taxable unless the joint ownership was created within one year of death. When joint ownership was created within that timeframe, the value may be fully taxable rather than just the fractional interest.
Agricultural and Family Business Exemptions
Families inheriting working farms or closely held businesses may qualify for significant exemptions under Pennsylvania law. Agricultural property used for farming purposes and transferred to qualified heirs can receive preferential treatment that substantially reduces or eliminates inheritance tax.
Similarly, family-owned enterprises meeting specific ownership and operational requirements may qualify for exemptions when transferred to family members who continue the business. If heirs sell the farm or close the business within a certain timeframe, Pennsylvania can reclaim the tax benefits.
When Is Pennsylvania Inheritance Tax Due?
Payments are due at death and become delinquent nine months after death; the return is due within nine months. If you file and pay within three months, Pennsylvania offers a 5% discount. After nine months, the tax becomes delinquent, and Pennsylvania charges interest calculated daily on unpaid amounts.
Payments are made payable to the Register of Wills in the county where the decedent resided. Executors typically handle filing the inheritance tax return (Form REV-1500) and making payment from estate funds before distributing assets to beneficiaries, but beneficiaries remain legally responsible for the tax on what they receive.
How Does Federal Estate Tax Interact With Pennsylvania Inheritance Tax?
The federal estate tax is separate from the Pennsylvania inheritance tax. The federal estate tax exemption is set at $15 million for 2026, indexed for inflation after that, assuming no future legislative changes. For estates above that threshold, the federal tax rate reaches up to 40% on a tiered basis on amounts over the exemption.
Can You Reduce or Avoid Pennsylvania Inheritance Tax?
Pennsylvania inheritance tax is difficult to avoid entirely, but strategic planning can reduce the burden:
- Lifetime gifting. Pennsylvania doesn't impose a gift tax, so you can transfer assets during your lifetime without triggering inheritance tax on those specific assets.
- Life insurance planning. Naming individuals as beneficiaries, not your estate, generally keeps proceeds tax-free for inheritance tax purposes.
- Charitable gifts. Charitable bequests in a will are exempt from Pennsylvania inheritance tax, along with transfers to qualifying religious, educational, and governmental organizations.
- Strategic asset titling. Joint ownership with a spouse avoids inheritance tax through the spousal exemption, though other joint arrangements may still trigger tax on the deceased owner's fractional interest.