If the Estate pays the Inheritance taxes on behalf of the Beneficiary does that payment become taxable as Income for the Beneficiary?

[DianeW777]

No.  If the estate tax was paid from funds that were part of the estate before distribution of the assets, then there would be no income to the beneficiary for this payment. Likewise there is no tax to the beneficiary on the assets distributed to you from the estate.  Later, when and if any assets are sold, there would be taxable gain or loss.

[kru1968]

There is no Estate tax in Pennsylvania, but each Beneficiary has an Inheritance tax to pay (4.5% - 15%) based on relation to Decedent.  Decedent's Manufactured home is being sold, and their Will instructs the Inheritance taxes for the Beneficiaries be paid from the proceeds of the sale (no Capital Gains).  I want to be sure that if the funds from the sale are used to pay the Inheritance taxes on behalf of the Beneficiaries, that those payments are not considered income for Income Tax purposes?

[DianeW777]

Yes, based on my assumption of your question, capital gains would still apply.  This doesn't eliminate the capital transaction, which the beneficiaries must report if there is no estate return required at the federal or state level.  The sale would be reported by each beneficiary and the gain or loss would be based on their cost.

• Percentage of the sale for each beneficiary less their cost, which is the inherited value on the date of death.  

You are correct, Pennsylvania (PA) doesn't have an estate tax, only an Inheritance tax. If an estate return is filed in PA, any income would flow to the beneficiaries and get reported on their personal income tax return (PA-40).  You would be required to report the sale exactly like the federal return.

• PA Estates, Trusts & Decedents

If this was sold relatively soon after inheritance then the sales price and cost would result in little to no gain on each of the beneficiaries return.  This applies to both ‌federal and ‌Pennsylvania (PA) tax returns.

[kru1968]

The home is a Manufactured home (double wide trailer), both "appraised" and selling price is $55,000 (purchase price was higher manufactured homes don't exactly appreciate in value).  There are no Capital Gains.  Any Net left after Estate expenses will be split between the 5 Beneficiaries.  Why would we need to file a Federal tax return?  Isn't any remaining funds considered Inheritance, not Income?  We are already each paying a percentage of the home Value in Inheritance taxes, why would any Net distributed to the Beneficiaries also be taxed as Income?   My question is specifically regarding the Inheritance tax payments made on behalf of the Beneficiaries.  Are those tax payments (paid by the Estate from the Net proceeds of the sale) then considered Income to the Beneficiaries? 

[DianeW777]

You are correct in respect to the fact there would be no capital gains since the selling price is the same as the value on the date of death (appraised) value.  The cost and selling price would be the same or‌ a loss when including selling expenses. The cost to the decedent would have no effect on the tax return. 

When determining filing requirement for federal purposes, it's the selling price (attributable to appropriate beneficiary) that determines filing requirement. The cost must be shown on the return to show the net result.  If a beneficiary doesn't meet the filing requirement, including their portion of the sales price, then a federal return wouldn't be required.  

The filing requirements  based on filing status can be viewed in the charts for federal and state below: 

• Do I need to file a federal return this year?
• Do I need to file a state return this year? (Simply click your state)

[kru1968]

Ok, so asking this question again:

Manufactured Home Value $55,000

Manufactured Home Sale Price $55,000 (No Capital Gains)

Each Beneficiary pays PA Inheritance tax on their 1/5th share $11,000

Each Beneficiary pays a percentage of 4.5% - 15% (for this discussion I will use 4.5%)

4.5% of $11,000 = $495.00

Sale Price $55,000 Less Real Estate fees $4,000 Net from Sale $51,000

Net from Sale $51,000 Less Estate expenses $15,200 = $35,800

$35,800 Less PA Inheritance Taxes for all Beneficiaries $2,475 = $33,325

$33,325 remains to be split among the 5 Beneficiaries and is Inheritance, NOT Income, correct?

The question is regarding the $2,475

If the Estate pays the PA Inheritance Taxes on behalf of the Beneficiaries, out of the Net proceeds from the sale of the Manufactured home, is that PAYMENT AMOUNT considered Income for PA Income Tax purposes?

In other words, would a Beneficiary have to claim $495.00 as Income?

[dmertz]

Inheritance tax paid by the estate on behalf of the estate beneficiary is part of the beneficiary's inheritance, not income to the beneficiary.  However, if the estate received taxable income and passes that income through to estate beneficiaries as Distributable Net Income, the beneficiaries will be responsible for the income tax on that DNI.  Two separate things.