As a taxpayer, you may receive a letter from the local tax collector (e.g., Berkheimer, Keystone Collections Group) that states that the income that was reported on your local earned income tax (EIT) return differs from what was reported to the local tax collector by the PA Dept. of Revenue (DOR). Why did you receive this letter? Part of the agreements between the PA DOR and the PA Department of Education requires that the DOR provide a report each year to each school district detailing the individuals that utilized their “school code” when they filed their state return and the income reported. This report is then used to verify that the school district is receiving all of the taxes it is due, as well as to determine funding levels to the district. The reports are released approximately 15 months after the taxpayer was required to file with the state. So as an example: the PA-40 form for 2013 was due 04/15/14. The report on the income reported by each taxpayer will be released in or around July 2015.
Should your local earnings match your state earnings? In 2003, the PA legislature passed ACT 166 which made the definitions of “earned income” and “net profits” identical for both local and state taxation purposes. The change was implemented to help eliminate the confusion that had existed to that point with what was taxable to each. By implementing the change, it became easier for taxpayers and preparers alike to know exactly what was to be reported to their local collector. The definitions are based on the state’s which are found in the “Tax Reform Code of 1971”. Based on ACT 166 there is only one source of earned income that is not taxed by both. That income source is “Clergy Housing Allowances” which are taxed by the state, but not locally.
Accordingly, what appears on a taxpayer’s PA-40 form as taxable W-2 earnings should also be reported on the local EIT return as taxable W-2 earnings. If the earnings do not agree, an individual should consult with the employer’s payroll department. Likewise, earnings from self-employment Schedule C and earned income from partnership K-1s should agree. However, K-1 income from an S Corporation is subject to taxation by the PA DOR, but not for local EIT purposes.
Reporting problems can arise:
- When a taxpayer resided in the named school district on the PA-40 for only a portion of the year. The state reports your full income based on the school district code used when you file the return at year end, so all income is attributed to the area named. If this is the case you may have filed for a portion of the year with another tax collector and that information is not shared between collectors, so there is no way to verify that without the local tax collector asking for the explanation of the difference.
- When a taxpayer did not live in the named school district at all for the year in question, but did move there in a subsequent year. This is another quirk of how the state tracks its taxpayers. If you live in School District XYZ in 2012 and moved to School District ABC in 2013, when your 2013 return is entered into the state’s system your school district for the prior year(s) on file are changed to reflect where you live currently. This results in you appearing to have resided in the current school district for the prior year as well, and that is the year being reviewed in this process.
If you want to discuss your tax preparation or tax planning concerns with an experienced tax professional, we invite you to call 610-594-2601 today to make an appointment at our Exton PA CPA office to discuss your situation. You can also schedule a consultation at Click Here.