Pennsylvania residents always have questions about filing their state income tax returns, which is why members of the Pennsylvania Institute of Certified Public Accountants (PICPA) seek to address many of the common issues below. From the classes of taxable income to who must file, the PICPA has you covered when filing your 2017 Pennsylvania personal income tax return. Please note, however, that due to the complexity and volatility of tax law, consult your CPA before acting on any of the information provided in this article.
Does Pennsylvania follow federal tax law?
No. Under federal law, all income is taxable income unless it is speciﬁcally exempted, excluded, or deducted. In Pennsylvania, according to the Uniformity Clause of the Pennsylvania Constitution, an item is taxable only if it ﬁts into an enumerated category. Pennsylvania imposes a ﬂat tax on eight classes of gross income rather than a graduated tax on net income.
Depending on your income and family size, you may qualify for a refund or reduction of your Pennsylvania income tax liability through the state’s tax forgiveness program. Eligible working families who paid income tax throughout the year may be refunded some or all of that paid tax. Retired persons and low-income individuals who did not have Pennsylvania income tax withheld from earnings may have Pennsylvania income tax liabilities forgiven.
There are special tax forgiveness provisions for qualifying low-income taxpayers whose income does not exceed $6,500 (single ﬁling, phasing out at $8,750) or $13,000 (married ﬁling separately or jointly, phasing out at $15,250), plus $9,500 for each additional dependent. Married persons may ﬁle for joint tax forgiveness. For example, a family of four (a couple with two dependent children) can earn up to $34,250 a year and qualify for some tax forgiveness.
To receive tax forgiveness, a taxpayer must file a Pennsylvania personal income tax return (PA-40), complete Schedule SP, and not be a dependent of another on a federal income tax return.
Which classes of income are taxable in Pennsylvania?
Below are the eight income types that are taxed by the commonwealth:
- 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. (Includes capital gain distributions as well as actual cash and property distributions from the earnings of any non-Pennsylvania S corporations that have not elected Pennsylvania S corporation status.)
- Net proﬁts from business, profession, or farm, including interest income from business working capital.
- Net gain from the sale or disposition of property. Gain on the sale of a personal residence, however, may be excluded if residency requirements are met. (Gains and losses from the sale of business assets are generally characterized as trade or business income/loss.)
- Net income from rents, royalties, patents, and copyrights.
- Income from estates and trusts.
- Gambling and lottery winnings, including Pennsylvania state lottery prizes. (Qualifying and substantiated gambling losses may offset to “net” taxable gambling winnings.)
What is Pennsylvania’s income tax rate?
The personal income tax rate for 2017 is 3.07 percent.
Are joint tax returns accepted?
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. Beginning on or after Jan. 1, 2013, a surviving spouse may file a joint return for the year in which his or her spouse died, if the joint return could have been filed if both spouses were living for the entire taxable year. If both taxpayers die during the same tax year, a joint final return may be filed if a joint return could have been filed had both spouses lived for the entire taxable year and with the consent of the personal representatives, executors, or administrators of both deceased spouses by the due date, including extensions, of the joint tax return.
Separate returns are required if either spouse individually claims an Employment Incentive Credit, Jobs Creation Credit, Research & Development Credit, Pennsylvania Film Production Credit, or Organ and Bone Marrow Donor Credit.
When are returns due?
The state tax return due date is April 15, 2018, for individuals and other calendar-year taxpayers. Extensions for ﬁling are available, but the amount of tax you owe is required by the April 15 due date.
Are some types of income taxable in Pennsylvania but not for federal purposes?
There are a few income sources that are taxable on the state level that are not taxable on the federal level.
- Municipal bond interest from jurisdictions outside Pennsylvania
- Gain on like-kind exchanges or from involuntary conversions (note that involuntary conversion gains after Sept. 10, 2016, may be deferred)
- Employee contributions to employer-established retirement, proﬁt sharing, or deferred compensation plans
- Installment sales of intangible property
Are some types of income taxable for federal purposes, but not in Pennsylvania?
There are a few income sources that are taxable at the federal level but generally are not taxable at the state level.
- Income from pension plans, Social Security, Supplemental Security or SSI, railroad retirement, veterans pensions, IRAs, and 401(k)s to a qualifying retiree
- Unemployment compensation
Who must file?
Whether you are a resident or nonresident, you must ﬁle a tax return if your Pennsylvania taxable income exceeds $33 during the taxable year, or if you incurred a loss from any transaction as an individual, sole proprietor, partner in a partnership, 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 are 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.
For more tax tips from Pennsylvania CPAs, visit www.picpa.org/taxhelp