Pennsylvania Taxation Is Different Than in Most States

Pennsylvania Taxation Is Different Than in Most States

Joseph Klinke, CPA, CGMA
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Pennsylvania isn’t like most of the other states. While states typically have some tax laws that do not conform exactly to federal income tax rules, Pennsylvania has some unusual differences that all tax preparers need to be aware of.

One unusual and significant difference is that all taxpayers are treated equally based on their own respective incomes. This mean that taxpayers filing jointly don’t enjoy the benefits of one having a loss and the other a gain in the same income class. We all recognize that if a taxpayer has a $100,000 profit in his/her personal brokerage account, and the spouse has a $100,000 loss in his/her brokerage account, federally, the activity has zero net capital gain income. But that isn’t the way Pennsylvania sees it. In Pennsylvania, if the party with the loss has no offsetting capital gain income, then the loss is lost, and the party with the $100,000 gain is required to pay taxes on the gain. Therefore, it is critical that brokerage account titles be looked at rather than just the tax ID, so that the net gain/loss will be attributed to the proper taxpayer, or split if it is a joint account.

In federal returns and in most states that base their income tax on federal income (modified or unmodified), installment sales are allowed without regard to the type of property sold or by whom. Pennsylvania takes a different position here also. Pennsylvania only honors installment sales of real and tangible property and taxes 100% of the gain from intangibles at the time of the sale. Further, accrual basis taxpayers are never allowed to report the gain on installment sales over the collection period no matter what was sold.

The state also looks at “interest” differently. Interest collected on an installment sale is reported as a gain from the sale of property, generally with no basis on Schedule D. Interest earned by a business, profession or farm in the ordinary course of trade or business or through the temporary investment of working capital funds are considered to be part of business income.

Taxpayers and preparers also need to be aware of a difference when reporting wages income. It is unusual for Pennsylvania wages to be less than Medicare wages. When this is encountered, a PA-40 W-2 RW wage reconciliation form should be submitted with the return. If the form isn’t submitted, the taxpayer can expect correspondence from Pennsylvania requesting a reconciliation of wages.

Lastly, gains resulting from the sale of a personal residence are not taxable and are not subject to a cap as they are in a federal return.

NEED MORE INFORMATION?

If you have any questions about this Tax Tip, please contact your WithumSmith+Brown professional, a member of WS+B’s National Tax Services Group or email us at [email protected].

David Springsteen, CPA, MBA
Practice Leader, Tax Services Group
609.520.1188
[email protected]

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