Understanding Pennsylvania Estate Tax Laws
NOTE: State laws change frequently and the following information may not reflect recent changes in the laws. For current tax or legal advice, please consult with an accountant or an attorney since the information contained in this article is not tax or legal advice and is not a substitute for tax or legal advice.
The answer to this question is No, currently, Pennsylvania does not collect an estate tax at the state level.
A few years ago, however, things were different before major changes took effect with regard to federal estate tax laws. What do federal estate tax laws have to do with Pennsylvania estate taxes? Prior to January 1, 2005, Pennsylvania did collect a separate estate tax at the state level, called a "pick-up tax," that was equal to a portion of the overall federal estate tax bill.
The Pick-Up Tax
The "pick-up tax" is a state estate tax that is collected based on the state estate tax credit that the IRS allowed on the federal estate tax return, IRS Form 706, prior to January 1, 2005. Each state had different tax laws with regard to the pick-up tax, so the amount that a state would collect varied based on that state's own estate tax laws. In essence, however, the overall estate tax bill was not increased or decreased due to the pick-up tax. Instead, the total tax bill was apportioned between the IRS and state taxing authority.
So, what does this mean in plain English? It means that a portion of the federal estate tax was actually taken away from the IRS and instead paid to the decedent's state taxing authority. Since as discussed below Pennsylvania collects a state inheritance tax, the Pennsylvania estate tax was equal to a portion of the pick-up tax.
Prior to January 1, 2005, if a deceased Pennsylvania resident owed federal estate taxes, then the Pennsylvania estate tax was determined by comparing the calculation of the maximum credit for state death tax (line 15 on IRS Form 706) to the amount of Pennsylvania inheritance tax. If the federal credit was greater than the state inheritance tax, then the difference between the two amounts equaled the Pennsylvania estate tax, which was paid to the Pennsylvania Department of Revenue.
The Future of the Pennsylvania Estate Tax
Effective January 1, 2005, the pick-up tax was officially phased out under the provisions of the Economic Growth and Tax Relief Reconciliation Act ("EGTRRA" for short). In response to these changes in federal law that phased out the pick-up tax, some states that used to collect a pick-up tax chose to enact laws that allow the state to still collect a state estate tax. This is referred to as "decoupling" since the states that enacted a state estate tax no longer based their state estate tax laws on current federal estate tax laws.
The majority of states did absolutely nothing and therefore no longer collect a state estate tax, and Pennsylvania was one of them. In addition, while under the provisions of EGTRRA the pick-up tax was supposed to return in 2011, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 ("TRUIRJCA" for short) did not include reinstatement of the pickup tax.
Nonetheless, the provisions of TRUIRJCA are set to expire on December 31, 2012, after which the pick-up tax is scheduled to return. Stay tuned for updates. For more on Pennsylvania estate taxes, refer to Difference between inheritance tax, estate tax and death tax in PA?
Pennsylvania State Inheritance Tax
An inheritance tax is a tax imposed on the individual beneficiaries of an estate, while an estate tax is imposed on the entire value of an estate. So, does Pennsylvania currently collect a state inheritance tax, as opposed to a state estate tax? The answer to this question is Yes, Pennsylvania is one of seven states that collect a state inheritance tax. For more information about the Pennsylvania inheritance tax, refer to the State Inheritance Tax Chart.