Only a few states have their own death taxes, and Pennsylvania is one of them. A good estate plan will take both the state's inheritance tax and the federal estate tax into consideration. If the U.S. House of Representatives has its way, though, the federal tax may be nothing more than an unpleasant memory.
In September, when Congress returns from its summer vacation, the House is expected to have a full vote on a bill that would eliminate the federal estate tax, eliminate the generation-skipping transfer tax and permanently change the gift-tax rate to 35 percent with a lifetime exclusion at $5 million.
The estate tax has been a source of debate, if not contention, for the past few years. Right now, the tax is set at 40 percent with a $5.3 million exemption (adjusted for inflation) for individuals.
Remember, an estate is the combination of both assets and liabilities of the decedent; the gross adjusted estate is that amount minus deductions for administrative costs, funeral expenses and so on. The federal government deducts the exemption from that amount and applies the tax to what's left over. So, if someone's gross adjusted estate totals $6 million, only $700,000 is subject to the 40 percent tax. If someone's gross adjusted estate totals $4 million, the IRS collects no tax.
The calculation to determine the state's inheritance tax is much different. The state ignores the gross adjusted estate and looks instead at the value of each beneficiary's inheritance. A decedent's spouse and children under 21 are exempt. The tax on the rest will differ based on the beneficiary's relationship to the decedent. Grandparents, for example, are taxed at a lower rate than siblings; siblings are taxed at a lower rate than cousins.
We will discuss the generation-skipping transfer tax in our next post.
Source: Crain's Wealth, "Plan to ax estate tax gains momentum in House," Mark Schoeff Jr., July 24, 2014