The PA Department of Revenue (DOR) does not make it easy for its resident taxpayers.
If you are a retiree and receive IRA, pension or annuity retirement benefits, that income, while taxable for federal income tax reporting purposes, is not taxable for the PA personal income tax (PIT). This is one reason why many retirees find PA an attractive state to reside in their retirement years.
What happens if the payer of the retirement distribution withholds PA PIT? In the past, the taxpayer would claim the withheld tax on his/her tax return and that tax withholding would be used as a tax credit against any other taxes due, or be refunded to the taxpayer.
The PA DOR has now taken the position that further support is required to claim the tax withheld as a tax credit. The PA DOR will now take the following verification steps because it claims that in the past some payers failed to remit the withheld taxes to PA. So rather than going after those few payers who absconded with these withheld taxes and prosecuting them, the PA DOR is passing the compliance burden onto its individual taxpayers.
- PA states that tax preparers should inquire of their clients as to why PA PIT taxes were withheld from non-taxable retirement monies received. This statement, along with a statement that any recurring future payments from that payer for the taxpayer will have the withholding.
- An actual copy of the 1099-R form must be sent to the DOR.
So what action is required by you if your payer is withholding PA PIT from your retirement benefits? If you voluntarily had PA PIT withheld to avoid paying estimated income taxes on your interest, dividend, or capital gains income, contact the payer and submit new withholding forms to show that zero PA taxes should be withheld. What if your former employer who distributes the pension income says that its systems are set up to automatically withhold at the state tax rate where the retiree resides and refuses to make the change? We suggest that you start by showing them this posting and a copy of the PA statute that says that retirement income is not taxable in PA and explain the hardship the company’s policy is causing you. If nothing else, you will have created a written history of your request and your former employer’s response refusing to make a simple programming change which you can then send the PA DOR each year in the hope of the DOR granting you a credit for the PA taxes withheld.
If you want to discuss your business or personal tax planning and tax preparation 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.