Local Earned Income Tax (EIT)
Act 18 of 2018 Enacted
Allows PA Taxpayers to Be Taxed Uniformly
Before the enactment of Act 18 of 2018 (effective July 3, 2018), there existed a lack of uniformity among the various local tax jurisdictions and some jurisdictions acted in an arbitrary and capricious manner when it came to taxing individuals. The new act brings uniformity and fairness to the enforcement of the Local EIT.
Tax practitioners have been requesting changes to the local EIT for several years. In November 2016, the governor unexpectedly vetoed nearly identical legislation (House Bill 245) due to concerns about the impact of the bill. Wolf had stated his opposition was because the legislation “would cause even a limited number of school districts to lose revenue …” and requested “a modified version of this bill that does not negatively impact the finances of school districts.” The Pennsylvania Institute of CPAs has stated that “The signing of Act 18 is a huge victory for Pennsylvania residents . . . .” “Equity and fairness are two of PICPA’s Guiding Principles of Good Tax Policy, and this law clarifies the crediting language for local tax collectors, which should foster uniformity and efficiency across the state.”
Act 18 amends several items within Act 32 of 2008, which brought sweeping changes to how Pennsylvania collects local earned income taxes. While Act 32 made the collection process simpler, an unintended consequence allowed some collectors to limit local credit provisions, thus resulting in some Pennsylvania residents being taxed twice on the same income. The new law prevents this practice and makes collection more uniform across the state.
Planning TIP:
PA residents who work outside of PA and pay state income taxes to a non-PA state are allowed to claim a credit for those income taxes against their PA personal income tax (PIT). Any non-PA income taxes that were not used as a credit against PA PIT are now eligible to be applied against the entire local EIT tax rate. Formerly, some local jurisdictions with a tax rate greater than 1% disallowed credits being applied in excess of the 1% limitation.
Planning TIP:
Act 18, which takes effect July 3, 2018, provides for clear and concise safe harbor language for estimated taxes. Taxpayers who make four equal, timely estimated tax payments that are equal to 100% of their prior year’s local taxes or 90% of their current year’s tax liability as estimated tax payments will not be subject to penalties for underpaying their estimated taxes. Under prior law, any underpayment of the current year’s tax could subject the taxpayer to an underpayment penalty.
Planning TIP:
Act 18 prohibits penalties against those with no earned income who do not file a local tax return. Some jurisdictions had required taxpayers with no local EIT to file a return and if none were filed, some jurisdictions imposed a penalty for failure to file. The Act 18 states that taxpayers with no earned income are not required to file a local EIT return, and accordingly would not be subject to a penalty for failure to file. We recommend that taxpayers who no longer have earned income file a “Final Tax Return”.
Planning TIP:
Act 18 establishes oversight of local tax collection committees. Under prior law, the PA Department of Community and Economic Development (DCED) had no power for enforcement. Act 18 gives power to DCED to enforce the provisions set forth in Act 32. Taxpayers will also be provided with a way to report local tax collection issues.
Planning TIP:
Taxpayers will also see enhanced W-2 reporting requirements whereby the full political subdivision code will be used in a format to clarify the tax rate that was used and where the tax was remitted. In addition, tax audits will be done on a calendar year basis and local tax forms are to be standardized by 2020.
Unresolved Issue:
This act becomes effective on July 3, 2018. Will some local tax jurisdictions require two separate local tax filings . . . one for the period beginning January 1, 2018 through July 2, 2018, and a second for the period from July 3, 2018 through December 31, 2018?
If you would like to discuss your business or personal tax planning, tax preparation and other financial 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.
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About F. Bryan Haarlander, EA, CTRS:
Bryan Haarlander is an IRS licensed Enrolled Agent and who owns and operates a specialized tax services firm serving clients in the western suburbs of Philadelphia, PA, which includes the cities of Chester Springs, Coatesville, Collegeville, Devon, Downingtown, Exton, Frazer, King of Prussia, Paoli, Philadelphia, Phoenixville, Pottstown, Radnor, Reading, Wayne, West Chester in Berks, Chester, Delaware, Montgomery and Philadelphia Counties, as well as clients in Delaware, New Jersey, New York and throughout the continental USA.
A Certified Tax Resolution Specialist, Bryan is well-known for his IRS tax resolution expertise and his book How to Resolve Your IRS Tax Debt Problems.
