Q&A with the Pennsylvania Department of Revenue

Scenario: Claiming resident credits on trusts

Dec 08, 2016
Q:

For a PA irrevocable trust that is treated as a Federal grantor trust, the trust is disregarded by Federal and most states. For Pennsylvania, the trust is taxed unless all of the income is distributed to the beneficiary. How would the beneficiary of the trust be able to receive equitable tax treatment by being able to claim resident credits in the following two situations:

An S Corporation shareholder is an irrevocable grantor trust. The S Corporation files a composite tax return on behalf of the trust in another state that follows Federal grantor rules. If the trust distributes all of the income to its PA resident individual beneficiary, will the individual beneficiary be permitted to claim the resident credit from the S Corporation composite filing on his/her PA personal return?

A:

Yes.  The tax paid to both states is paid by the beneficiary of the trust when the trust distributes its income. If the trust does not distribute its income, the resident credit would not be allowed.

Q:

An S Corporation shareholder is an irrevocable grantor trust. The S Corporation does not file a composite tax return in a state that follows Federal grantor rules. Instead, the PA resident individual beneficiary files a nonresident personal return in that other state and recognizes tax on business income from the S Corporation. The trust distributes all of its income to the beneficiary, and therefore the beneficiary recognizes trust income in Pennsylvania. Will the individual beneficiary be permitted to claim the resident credit against this trust income on his/her PA personal return if the income taxed in the other state is classified as S Corp/business income in the other state?

A:

Yes, the tax paid to both states is paid by the beneficiary of the trust when the trust distributes its income. If the trust does not distribute its income, the resident credit would not be allowed.

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These documents provide a summary of the answers provided by the Department of Revenue to the PICPA Committee on State Taxation at its annual question and answer session. These documents are classified as revenue information issued for informational purposes only for the convenience of PICPA members. Pursuant to 61 Pa. Code Section 3.4, these documents should not be relied upon for any purpose or used in tax appeals. Taxpayers requiring a binding opinion on their specific fact situation may request a written letter ruling under 61 Pa. Code Section 3.3.