When an individual dies, there are four taxing systems that come into play: the Pennsylvania Inheritance Tax; the Federal Estate Tax; the Decedent’s final income tax returns (Pennsylvania and Federal and local earned income tax); and the income tax returns for the Estate (Pennsylvania and Federal).
The Pennsylvania Inheritance Tax Return is due within nine (9) months of the date of death. A five percent (5%) discount may be obtained if a prepayment is made within ninety (90) days of the date of death. The Pennsylvania Inheritance Tax Rate(s) depend on the relationship between the decedent and the beneficiaries to whom the assets are passing. Under current law, the Pennsylvania Inheritance Tax Rate on assets that pass to the decedent’s spouse is zero (0). Net assets which pass to the decedent’s children (or grandchildren) are taxed at the rate of 4.5%. Assets that pass to the decedent’s siblings are taxed at the rate of 12%. Assets passing to other persons (cousins, nieces or nephews, friends) are taxed at the rate of 15%.
The Federal Estate Tax Return, if any is required, is also due within nine (9) months of the date of death. The Federal Estate Tax generally affects only very large estates (currently estates greater than $11,580,000). Since the tax is only imposed on such large estates, the tax rates are high, up to 40%.
Income tax returns (Federal, Pennsylvania and possibly local earned income) should be filed for the calendar year in which the Decedent died. Each return should be designated as the “Final Return.”
Fiduciary Income Tax Returns (Federal and Pennsylvania) may also be due for the Estate. This will depend on what assets are collected by the Executor, and whether the assets are invested to generate income while held by the Estate prior to distribution.