Who must file?
You must file a tax return if your Pennsylvania taxable income exceeds $35 during your taxable year or if you incurred a loss from any transaction as an individual, sole proprietor, partner or shareholder of an S-Corporation. Wages earned from work performed in Pennsylvania by residents of Indiana, Maryland, New Jersey, Ohio, Virginia or West Virginia is not subject to Pennsylvania state income tax. If Pennsylvania taxes were improperly withheld from residents of these states, a return should be filed to obtain a refund.
Recent Changes to Individual and Business Taxes
• Compensation now includes distributions from nonqualified deferred compensation plans attributable to an elective deferral of income, and is taxable regardless of whether the distribution is paid during employment or retirement. • Non-cash exchanges of life insurance annuity contracts now follow federal rules, and are treated as a tax-free exchange. If the exchange involves cash, the amount of cash received will be taxable as interest income. • Any distributions paid out of a health savings account that do not go toward the qualified medical expenses of a beneficiary, as well as any excess contributions, shall be taxable. • Taxpayers who receive personal income tax refunds will be able to make contributions for military family relief assistance through a check-off on the personal income tax return for tax years beginning after Dec. 31, 2004. Other existing check-offs will terminate as follows: Korea/Vietnam War Memorial: Breast and Cervical Cancer Research: Wild Resource Conservation: Juvenile Diabetes: Dec. 31, 2005 Jan. 1, 2008 Jan. 1, 2008 Dec. 31, 2008 Dec. 31, 2008 liabilities. This is intended to provide the Department of Revenue with the ability to receive 100 percent of delinquent tax liability and recoup the collection costs. • Capital Stock/Franchise Tax rate for 2005 is 5.99 mills. • The underpayment penalty will not apply with regard to installment payments of estimated tax in the case of a decedent’s estate or a trust created by the decedent to receive the residue of the decedent’s estate for two years after the decedent’s death. • The fine for furnishing a false or fraudulent information return (K-1) to a partner has been increased from $50 to $250. • The Department of Community and Economic Development (DCED) will now administer the awarding of the Film Tax credit on a “firstcome, first-served” basis, using the date on which principal photography in Pennsylvania starts. DCED will certify the amount of the credit to Department of Revenue. Only $10 million of credits may be awarded in any fiscal year. Credit applications are based on budgeted expenses. Filmmakers who are awarded the credit and fail to incur the agreed amount of qualified film production expenses must refund any unearned credit claimed. • If a vehicle dealer makes taxable use of a motor vehicle from its inventory, the dealer must pay Use Tax equal to 6 percent of the fair rental value of the motor vehicle during the period of use. Previously, this provision only applied for one year from the day the vehicle was acquired by the dealer. A requirement that the dealer notify the Department of Revenue of the election to pay tax on the fair rental value within 10 days of the commencement of use was eliminated. • The Department of Revenue will generally follow the IRS rules for extending the filing and payment deadlines for business and individual taxpayers directly effected by Hurricane Katrina. It will work with taxpayers on a case-by-case basis to ensure that they are given the time they need to complete their Pennsylvania tax returns.
Pennsylvania State Taxes
Tips for Filing 2005 Income Tax Returns
What is the rate?
The personal income tax rate is 3.07 percent for 2005.
May joint tax returns be filed?
Yes, but only for taxpayers’ convenience. There are no special joint return rates. One spouse’s losses or deductions may not be used to offset the other spouse’s income or gains. In the year of a spouse’s death, separate returns must be filed. Separate returns are also required if either spouse individually claims an Employment Incentive Credit, Jobs Creation Credit, Research & Development Credit or PA Film Production Credit.
When are returns due?
Tax returns are generally due April 15 for individuals and other calendar year taxpayers. Extensions of time to file are available, however, the amount of tax you owe is due when you request the extension.
Organ and Tissue Donation Awareness: Jan. 1, 2008 Military Family Relief Assistance:
What provisions apply to income not subject to withholding?
Individuals, estates and trusts must make estimated tax payments at the 3.07 percent rate on income not subject to withholding, if income exceeds $8,000. To avoid penalties, individuals can satisfy the minimum estimated tax requirement by: • Making timely estimated payments equal to 90 percent of the tax due shown on the final return, or • Making timely estimated payments equal to 3.07 percent of the prior year’s taxable income.
• The Pennsylvania Department of Revenue is authorized to impose a 10 percent of the face amount up to $1,000, for any electronic funds transfer denied or not credited upon transmission. This is the same fee applied to bad checks. • The Department of Revenue is authorized to electronically file liens with county courts, when requested to do so by the court. The filing fee may also be made electronically. • Effective immediately, the Department of Revenue is authorized to add the cost of collecting delinquent taxes to delinquent tax
www.picpa.org December 2005
Due to the complexity and volatility of tax law, consult your CPA before acting on any of the information provided in this brochure.
Personal Income Taxes
Does Pennsylvania follow federal law?
Pennsylvania does not adopt the Internal Revenue Code for personal income tax purposes. The state imposes a flat tax on certain enumerated classes of gross income instead of a graduated tax on net income. However, there are special tax forgiveness provisions for certain low-income taxpayers whose income does not exceed $6,500 (single filing) or $13,000 (married filing separately or jointly), plus $9,500 for each additional dependent. Married persons may file for joint tax forgiveness. A single parent with one child or a couple with two children will owe no tax on eligible income up to $16,000 and $32,000, respectively.
What are some types of income taxable in Pennsylvania, but not for federal purposes?
• Municipal bond interest from jurisdictions outside Pennsylvania. • Gain on like-kind exchanges. • Employee contributions to employer-established retirement, profit sharing or deferred compensation plans.
What are the Federal and Pennsylvania differences in allowable deductions?
Pennsylvania tax is basically a tax on classes of gross income, with very limited deductions permitted. Some key provisions include: • Employees are permitted deductions against W-2 PA gross earnings for certain unreimbursed, work-related expenses, such as travel, moving, educational and home office expenses. • IRA contributions are not deductible. • Federal uniform capitalization rules for inventory do not apply to proprietorships, S-Corporations or partnerships. • The forfeited interest penalty may only offset the interest income on the certificate or account redeemed. Any excess is treated as a loss on the disposition of property. • Business meals and entertainment expenses are not subject to the 50 percent federal deduction exclusion. • Alimony is not deductible, nor is it taxable to the recipient. • There are no personal exemptions. • There are no standard or itemized deductions. • Owners’ contributions to their Keogh and 401(k) plans are not deductible. • Federal 30 percent and 50 percent bonus depreciation rates are not permitted. • Section 179 expense deduction is limited to $25,000. • Federal Domestic Production Activities Expense (IRC 199) must be added back to any individual, partnership, LLC or Pennsylvania S-Corporation returns. • Federal expensing of intangibles (organizational expenses, start-up expenses, and syndication fees) allowed under the American Jobs Creation Act of 2004 must be added back to any individual, partnership, LLC or PA S-Corporation returns.
How does the requirement regarding withholding by partnerships and S-Corporations for nonresident partners and shareholders work?
Pennsylvania businesses must withhold Pennsylvania tax on behalf of nonresident shareholders or partners and remit the tax using the personal income tax estimated payment forms. Entities classified as partnerships for federal income tax purposes must withhold and remit corporate net income tax from corporate partners that had not filed a tax report or paid corporate net income tax for the previous year. Failure to withhold can result in liability to the S-Corporation or partnership. There is an underpayment penalty for entities not meeting withholding requirements. Quarterly withholding and payments are required unless total withholding is less than $500, in which case payment would be due within 30 days of the close of the taxable year.
What are some types of income not taxable in Pennsylvania, but subject to federal tax?
• Interest earned on U.S. securities • Retirement benefits paid to persons retired from service • State tax refunds • Premiums paid by employer for group term life insurance • Alimony • Unemployment compensation or public assistance • Social security benefits, foster care payments • Value of employee’s use of a company-owned car • Pennsylvania lottery winnings including winnings from Powerball tickets purchased in Pennsylvania.
What classes of income are taxable in Pennsylvania?
• Compensation • Interest (Interest income derived from business working capital is generally characterized as business income and interest income derived from an installment sale is generally characterized as capital gain.) • Dividends, including capital gain dividends and actual cash and property distributions from the earnings of any non-Pennsylvania S-Corporations. • Net profits from business, profession or farm, including interest income from business working capital. • Net gain from the sale or disposition of property (Gains and losses from sales of business assets are generally characterized as trade or business income/loss). 100 percent of the gain on the sale of a personal residence may be excluded if the requirements are met. • Net income from rents, royalties, patents and copyrights. • Income from estates and trusts. • Gambling and lottery winnings, except Pennsylvania state lottery prizes including winnings from Powerball tickets purchased in Pennsylvania.
What are the special rules regarding sale or exchange of property?
In calculating gains, if the property sold was acquired prior to June 1, 1971 (the effective date of the Pennsylvania income tax law), and the fair market value on the date was more than the cost basis, the higher value may be used to compute the taxable gain. Any amount of gain from the sale of a personal residence after 1997 is not taxable so long as the two-year ownership and use qualifying requirement is met. An exception is provided to this qualifying requirement if the sale, exchange or disposition is because of a change in employment, health or to regulation-specific unforeseen circumstances. The installment sales method of reporting gains may be used on the sale of certain real and tangible personal property, but not on the sale of intangible property, such as stocks or bonds. The net losses of one spouse may not be used to offset the net gains of the other spouse. Gains and losses from the sale of U.S. or Pennsylvania securities issued prior to Feb. 1, 1994, should not be reported. Gains on the sale of exempt Federal and Pennsylvania obligations issued on or after Feb. 1, 1994, must be reported. Unused capital losses may not be carried back or forward.
May losses from one class of income reduce Pennsylvania taxable income?
Within each class of income, losses may offset income, but if the class reflects an overall loss, it is considered zero and may not be used to reduce taxable income in another class. If a joint return is filed, a taxpayer’s net loss in one class may not offset a spouse’s net income in the same class. There are no provisions for carryback or carryover of net operating losses for individuals. Note: To the extent that losses from S-Corporations or partnerships are not deductible within a particular class of income, the owner's tax basis in that entity is not reduced.