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Trustees and Executors Beware: PA changes income tax rules

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Executors, Trustees and tax preparers need to be aware of changes in Pennsylvania income tax law that became effective this year.

Pennsylvania levies income tax at the current rate of 3.07% on taxable income earned by individuals, estates and trusts. Individuals file a PA Form 40 income tax return to report their taxable income. Executors and trustees file a PA Form 41 Fiduciary return.  

If an estate or trust is subject to PA income tax, the tax liability is allocated between the beneficiaries and the estate/trust based upon whether the income is distributed to the beneficiary or retained by the trust.  See, 61 Pa. Code §§ 105.2 – 105.4.

In 2013 Pennsylvania enacted Act 52 (HB 465) which made several important changes regarding the income of estates and trusts.   

  • Withholding tax. When an estate or trust receives income from PA sources which is allocable to a nonresident beneficiary, it must now pay a withholding tax.
  • Non-Resident Estates and Trusts. Every estate or trust having a PA resident beneficiary which has any income from PA sources is now required to file Pennsylvania income tax returns.

Note that the withholding tax applies only to estates and trusts that have “income from PA sources.” This would generally be income derived from one of the following sources:

 • Operation of a business or ownership in a partnership, S corporation or limited liability company that has operations wholly or partially within Pennsylvania;

• Ownership of rental property or a partnership, S corporation or limited liability company that owns rental property located in Pennsylvania;

• Sales of tangible property located in Pennsylvania;

• Gambling and lottery winnings from a wager placed in Pennsylvania; and/or

• Estate or trust income from another estate or trust that has income from any of the above sources.

Act 52 further requires that the tax returns set forth all items of income, loss and deduction, and such other pertinent information as the PA Department of Revenue may require. The changes are effective for tax years beginning after December 31, 2013.

In response to these new requirements, the PA Department of Revenue has issued some initial instructions.  In its April/May 2014 Tax Update the department advises:

To enable taxpayers and tax professionals to file short-period returns for tax years beginning in 2014, the department has developed the 2014 forms earlier than in previous years. However, the 2014 PA-41 forms and instructions will only be available upon request until all 2014 personal income tax forms and instructions are made available in January 2015. To obtain the 2014 PA-41 forms and instructions, call the Bureau of Individual Taxes Director’s Office at 717-787-8346.  

The Tax Update also contains a summary of the changes to the 2014 PA-41 forms, instructions, and reporting requirements. PA-41 instructions include new definitions for the terms nonresident beneficiary, resident beneficiary, Pennsylvania-source income, nonresident estate and nonresident trust.

The Department has not posted the new 2014 PA-41 online because it is still in the process of being revised. Where it is necessary to file a short year return for 2014, the Department will mail the Trustee the forms to use.

It is my understanding that, unlike estimated tax payments, the withholding tax does not have to be paid in advance or on a quarterly basis. While there will be no penalty for underpayment of the withholding tax during the year, that tax will be subject to late payment penalties if not paid when due.

An estate or trust that fails to file a required PA-41 is subject to a $250 penalty for each failure.

 

See, Pennsylvania Department of Revenue, Tax Update, April/May 2014: 2014 BRINGS MULTIPLE CHANGES TO FIDUCIARY RETURNS AND REPORTING REQUIREMENTS