Jan 22, 2020

Pa. Act 13’s Impact on Income, Inheritance, and Realty Transfer Taxes

Vicky Ann Trimmer, CPA, JDVicky Ann Trimmer, CPA, JD

With Act 13, which was signed June 28, 2019, Pennsylvania has adopted changes that will impact the taxes on income, inheritance, and realty transfers. These changes impact the preparation of tax returns and the planning we do for our clients, and the information provided could help you save them money.

Stamps for Rules and RegulationsThis blog is just a summary of some of what has been affected and does not include an analysis of every provision within Act 13. For greater detail, the Pennsylvania Department of Revenue (DOR) issued a summary of the act that can be found at www.revenue.pa.gov. In the search bar, type in “Act 13” and the 2019 tax summary will be located.

For the purposes of this blog, I’ll start with the personal income tax changes. These are effective for tax years beginning Jan. 1, 2020, unless noted otherwise.

  • A combined fiduciary income tax return may now be filed by the estate of a decedent and the trustee of a trust established by the decedent. This mirrors federal IRC Section 645, which allows a combined return. Previously, separate returns were required to be filed in Pennsylvania.
  • Paid tax preparers are required to sign all Pennsylvania tax returns and provide their IRS preparer tax identification number on the Pennsylvania return. A $50 penalty applies per return for those failing to do this. Note: the Pennsylvania DOR interpretation is that this is required for all tax returns filed starting Jan. 1, 2020, even though Act 13 says it is effective for tax years beginning Jan. 1, 2020.
  • The Pennsylvania tax treatment of Qualified Opportunity Zone net gains/losses and dividends now mirror the IRS treatment. If the income qualifies for the Internal Revenue Code (IRC) exclusion from income, it can also be excluded from Pennsylvania personal income tax.
  • Distributions from Section 529 savings plans that are excludable from federal income tax under IRC 529(C)(3)(B) are now excludable from Pennsylvania income tax.
  • The value of an Olympic medal or Olympic monetary prize that was received from the U.S. Olympic Committee is no longer taxable income. This exemption is limited to Olympic-related awards and medals, and is effective July 1, 2019.

Realty transfer tax changes included in Act 13 are intended to support and encourage beginning farmers. They were effective July 1, 2019.

A transfer of real estate subject to an Agricultural Conservation Easement to a “Qualified Beginner Farmer” is excluded from Pennsylvania realty transfer tax. The Agricultural Conservation Easement must be established pursuant to the Agricultural Area Security Law. “Qualified Beginning Farmer” is defined in the statute, and the exclusion only applies if the person has obtained written certification from the Pennsylvania Department of Agriculture confirming qualified beginner farmer status. It is anticipated that the certification will have to be attached to the realty transfer tax statement of value or the deed when no realty transfer tax statement of value is required. A detailed definition of a qualified beginner farmer has been added to the realty transfer tax statute.

The Department of Agriculture issued a certification for qualified beginner farmer application, which is available on its website. There are no supplemental instructions or guidance on the time it will take for the application to be processed. It will be important for any sales contracts to contain language that would allow for extensions on closing the deal when an application is pending.

A third area of change relates to the Pennsylvania inheritance tax. The change is designed to reduce the inheritance tax due on transfers to young children when they lose a parent, and is effective for dates of death on or after Jan. 1, 2020.

Transfers to (or for the use of) a child who is 21 years old or younger are taxed at a 0% rate if the decedent was the child’s natural, adoptive, or stepparent on the decedent’s date of death. Previously these transfers were subject to a 4.5% tax.

The DOR may begin requiring proof of status in the form of a valid birth certificate for natural and adopted children. For stepchildren, be prepared to supply the natural parent’s and stepparent’s marriage license in addition to the birth certificate.

Because the statute refers to “for the use,” the 0% rate will apply to a trust in which a child age 21 or younger is a beneficiary. This will complicate the filing of inheritance tax returns involving a trust that can pay income or principal to multiple children. A future interest compromise will be necessary to determine which portion of the trust is taxable at 0% and which portion is taxable at 4.5% on all trusts involving minor beneficiaries. Complicated calculations will need to be made because part of the life estate will be for when they are a minor and part will be distributed after age 21. The same is true for arguments applicable to the taxation of the remainder value. It will no longer be as simple as determining the life estate and remainder factors.

Understanding these income, inheritance, and realty transfer tax changes will allow you to help clients plan, support, and document those plans. Tax returns prepared using the knowledge of these changes will be ones that will be accepted promptly and without question.   

Always remember that you can reach out to members of the PICPA for further assistance with these changes.

Vicky Ann Trimmer, CPA, JD, is a partner with Daley Zucker Meilton & Miner LLC in Lemoyne, Pa. She can be reached at vtrimmer@daleyzucker.com.

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Statements of fact and opinion are the authors’ responsibility alone and do not imply an opinion on the part of PICPA officers or members. The information contained in herein does not constitute accounting, legal, or professional advice. For professional advice, please engage or consult a qualified professional.