As of 2016, only 8 states still charge inheritance tax. Even if you live in one of those states, some beneficiaries to an inheritance are exempt from paying it. Do you have to pay tax on an inherited property in Philadelphia? The following will help determine if you do.
What is inheritance tax?
Once the executor ( Person who has been appointed to manage the cash. Can be a family member or not) of the estate has divided the assets up and distributed them to the beneficiaries, the inheritance tax comes into play. The tax amount is calculated individually for each individual beneficiary, and the tax must be paid by the beneficiary. For example, a state may charge a 7 percent tax on all bequests larger than $2 million. Consequently, if your friend leaves you $5 million in his will, you just pay tax on $3 million, which is $210,000. The state would require you to report this information on an inheritance tax form.
The executor or administrator of an estate typically fills out the inheritance tax return forms on behalf of the beneficiaries. He or she only needs to complete one form, even if multiple people owe the inheritance tax. The tax form can be very complex; working with an experienced attorney will help you know for sure that the proper tax is paid.
After the form is completed, the executor usually pays the tax from the estate before the remaining amount is distributed to the beneficiaries. The executor or administrator has nine months from the date of death to pay the tax. Otherwise, a late penalty may be assessed.
The Difference Between Inheritance Tax & Estate Tax
The major difference between estate taxes and paying tax on an inheritance depends on who’s responsible for paying it. An estate tax is imposed on the value of property and a deceased person’s money and is paid out of the decedent’s assets before any distribution to beneficiaries.
Before an estate tax is due, the value of the assets must exceed certain thresholds that change yearly, but usually it’s at least $1 million. Because of this high threshold, Roughly only 2 percent of citizens will ever have to pay this tax.
States with an inheritance tax
The federal government does not collect inheritance tax. It IS ONLY AT THE STATE LEVEL – The eight states that collect inheritance tax are Indiana, Iowa, Kentucky, Maryland, Nebraska, New Jersey, Pennsylvania and Tennessee. All state laws are subject to change at anytime, so always check with your state’s tax bureau. The tax rates can be as low as 1 % or as high as 21% of the value of property and cash you are inheriting. Please check the chart for your state.
Inheritance and estate taxes are one of the most hindering taxes for economic growth and have been shown to suppress entrepreneurship, and have heavy compliance costs.
The Stepped-Up Basis Rules Change Those Who Inherit Property
Step up in basis is the readjustment upon inheritance of the worth of an appreciated asset for tax purposes, discovered to be the higher market value of the asset at the time of inheritance. When a house is passed on to a beneficiary, its worth is usually more than when the previous owner bought it. “Basis” means the asset’s price used for tax purposes. To ascertain whether you’ve a gain or less when you sell an advantage, its basis is subtracted by you from the sale cost. You’ve got a gain if you’ve got a positive number. You’ve got a loss, if you’ve got a negative number.
The basis of a dwelling you construct or purchase is its price, plus any improvements you make while you possess it.
Nevertheless, the tax basis of a home’s is established after the owner dies otherwise when someone inherits a house. This implies that the price for tax purposes of the home’s isn’t what the -deceased earlier owner paid for it. This will typically be more than the earlier owner’s basis.
The bottom line is that if you after sell it and inherit property, you pay capital gains tax based just on the worth of the property as of the date of death.
Example: Jean inherits a house from her dad John. He paid $100,000 for it over 20 years past. John made $20,000 in progress over the years, so his ‘s tax basis in his house just before died was $120,000. However, when the house is inherited by Jean its basis is stepped-up to its fair market value on the date of the departure of John. Jean has the house appraised and this value is set at $300,000. The house is sold by jeans for $310,000 a few months after she inherits is inherited by her. $300,000 is her tax-basis on the house. She subtracts this amount from the sales price to establish her gain that is taxable: Sold price of 310,000 – $300,000 = $10,000 gain.
If you sell an inherited dwelling for less than its stepped-up basis, you’ve got a capital loss that can be deducted (assuming you do not use the dwelling as your private residence).
However, there is a max of $3,000 of total losses can be deducted against your income every year. Any excess must be spread out and deducted on future tax years until the total amount is deducted.
Inheritance tax exemptions in Philadelphia, PA
Depending on your own relationship to the decedent, you may receive an exemption or decrease in the amount of inheritance tax you must pay. For example, Philadelphia, Pennsylvania exempt a partner from the tax when the property is inherited by them from their partner. ( Husband or Wife – Up to the First $30,000)
The tax rate for Pennsylvania inheritances depends upon how close the familial connection is between the deceased person and the person receiving the inheritance. No inheritance tax will be owed if the beneficiary is:
- A surviving spouse of the deceased
- A parent of a deceased adult child
- A charitable organization
There are also classes of people deemed to be close familial relations of the deceased; however, they do owe an inheritance tax. These individuals include children of the deceased and parents of a minor; they are considered “Class A heirs,” and they owe a 4.5% inheritance tax on the amount they receive.
“Class B heirs,” such as siblings of the deceased, owe a 12% tax rate. All other beneficiaries pay the collateral tax rate of 15 percent.
Rates for Inheritance Tax
The rate of tax imposed on transfers to or for a surviving spouse are based on the date of death of the decedent and taxed as follows:
|Dates of Death||Rate|
|Prior to July 1, 1994||6%|
|July 1, 1994 through December 31, 1994||3%|
|January 1, 1995 and after||0%|
- We are not Attorney’s and this is not to be accepted as legal advise, we always recommend seeking counsel from an experienced Attorney to assist with your inheritance.