PA individual return. Pension taxation

[Guest Taxed]

I was just informed that one of my good clients is moving back to PA from MA for good this year because of family issues.

She gets a teachers state pension that is non taxable in MA for state purpose.

I understand PA has similar rules where they do not tax state pensions.

The question is will PA allow that for a MA state pension just the same.

I looked at the PA website and it does not say it in so many words but says that if the distribution code is 7 then it is not taxed in PA?

Any PA preparers have experience with this non state pension issue?

[jklcpa]

In general, distributions with code 7 that are from "qualified pensions" will be excluded from PA income. If the distributions were paid after she met the age and service requirements of the plan and meet the other criteria for being a "qualified pension" then it should be nontaxable. Being a state teacher's pension, I can't imagine that she wouldn't meet the rules to exclude it, but review the rules and put in your file:

https://revenue-pa.custhelp.com/app/answers/detail/a_id/433/related/1

[MsTabbyKats]

From the link:

Code 7 Normal Distribution. This distribution from an eligible Pennsylvania retirement plan is not taxable if you met the plan requirements (the age and/or years of service required by the plan) for retirement, and retired after meeting those requirements.

I have clients with NYS pensions (not taxable here) that moved to "other states"...where they are fully state taxable.

I'd give the PA tax dept a call.

[Guest Taxed]

Now I am scratching my head because of the NYS example. I have clients from NY collecting NYC pension who are taxed in MA after a exclusion amount that was negotiated by NY and MA states to allow each others residents

So now I am wondering if PA and MA have such arrangement.

I think I will have to call PA DOR?

How reliable are their answers? Is it like IRS??

[MsTabbyKats]

Now I am scratching my head because of the NYS example. I have clients from NY collecting NYC pension who are taxed in MA after a exclusion amount that was negotiated by NY and MA states to allow each others residents

So now I am wondering if PA and MA have such arrangement.

I think I will have to call PA DOR?

How reliable are their answers? Is it like IRS??

I'd say more reliable than people on a forum who never did a return like this.

[jklcpa]

Taxed, the town I live in is on is located right on the PA border. I've prepared plenty of PA returns over the last 30 years for PA residents that worked in DE and are collecting pensions from their former DE employers.

Since there is confusion about the definition, here is the way PA defines an "Eligible Pennsylvania Retirement Plan" (from the PA PIT guide):

Criteria for Retirement Plan to Qualify as an Eligible Pennsylvania Retirement Plan.

Under Pennsylvania law, retirement plans are considered eligible Pennsylvania retirement

plans only if the plan meets all of the tests under Eligible Pennsylvania Retirement Plan.

I already provided the link in my first post of the tests that must be met to be considered and "eligible PA retirement plan". It says nothing about the pension having to be located within PA. It means only that the pension making the payment must meet PA's criteria.

You are unsure about this. You should call the PA DOR.

[Guest Taxed]

Thanks Judy. Knowing that you have done PA residents with DE pensions makes me feel better. I always get nervous with quirky state rules because they never explain clearly. And then in MA we don't follow the Fed rules for many items so you have to be extra careful. My neighbor CT has a simpler system and I actually enjoy doing CT taxes more than I do MA.

I think my client is going to be happy that it will not hurt her state tax for pension income. She was worried because that is her only source of income. MA teachers don't qualify for SS.

[jklcpa]

To add to the above post, think about this hypothetical, very common scenario:

I have a client that worked for years for a DE employer while being a PA resident. That person contributed to a 401(k) thereby reducing their federal and DE wages by the deferral. PA does not allow the deferral and taxes the entire compensation in that year because they are a PA resident. When that PA resident retires from the DE company and starts collection on the 401(k) and the 1099R shows code 7 for the normal distribution, PA isn't going to tax it again simply because it came from DE.

[Guest Taxed]

Good point, and following that example if the distribution code was say 1, I think PA would tax them in full even though they paid the tax to PA when they were contributing because PA does not exclude the deferral.

See how quirky these state rules are.

[MsTabbyKats]

I don't do many PA returns and when I do I always have "issues". PA has reciprocal agreements with several other (neighboring?) states......NY isn't one of them. I would call the tax dept and find out if MA has an agreement. Otherwise, you're just using "an opinion". (DE is a neighboring state. MA isn't)

In NYS...a govt retirement plan isn't taxed like a 401-K. All NYS/C & Fed govt retirement plans are tax-free....only $20,000 of a 401-K or an other retirement income (pension from another state) is excluded.

I'd call.

[jklcpa]

Otherwise, you're just using "an opinion".

No, it isn't just an opinion. I provided unedited information directly from the PA DOR's website and PA's tax guides.

And fwiw, PA does not have any reciprocal agreement with DE. DE doesn't have reciprocal agreements with any state.

PA has reciprocal agreements with IN, MD, NJ, OH, VA, and WV.

[MsTabbyKats]

No, it isn't just an opinion. I provided unedited information directly from the PA DOR's website and PA's tax guides.

And fwiw, PA does not have any reciprocal agreement with DE. DE doesn't have reciprocal agreements with any state.

PA has reciprocal agreements with IN, MD, NJ, OH, VA, and WV.

Sorry...I should have said "interpretation" All of the "rules" are open to interpretation. That's what "tax court" is all about.

Whenever I'm not sure....I call the govt involved. NYS would fully tax the pension of any other state after the $20,000 exclusion.

[Guest Taxed]

Thanks everyone. I spoke to my client and gave her the citations from the PA website. I did tell her that my opinion is based on public information available from the PA website. If she wants to be 100% sure a call to PA DR would make sense and we can do that from my office before she moves back home.

She told me it will happen in 2014 spring most likely because she has to fix her house here and sell it. In the meantime she is commuting every other week to PA to take care of her elderly mother. The good thing is that this lady used to be the softball coach and is in good shape.

[kcjenkins]

Sorry...I should have said "interpretation" All of the "rules" are open to interpretation. That's what "tax court" is all about.

Whenever I'm not sure....I call the govt involved. NYS would fully tax the pension of any other state after the $20,000 exclusion.

I'm not criticising your answer, however I just have to point out that "calling them" just means you get "the opinion" or "interpretation" of the person on the other end of the line. I certainly know that I have gotten wrong answers from both state and federal help lines. I'd trust the advice of most of the experienced members here over that, if I got a different answer, altho of course that would lead me to ask more questions of the member first.

[Guest Taxed]

Having been burned by answers from my own state's DOR, I am always questioning the accuracy of the answer when I talk to a phone rep. I like to get a cite or actual experience of another preparer.

[MsTabbyKats]

Having been burned by answers from my own state's DOR, I am always questioning the accuracy of the answer when I talk to a phone rep. I like to get a cite or actual experience of another preparer.

I am crazy about doing research. I generally "figure it out" and then call the appropriate govt to confirm. If someone has actually done something, I'd take their word. But, when it comes to "analyzing", unless someone has specific experience, their interpretation is no more valid than mine.

In the case of PA...I have problems....always. I did a NJ res who worked in PA and paid local tax. I never knew that the PA local tax could be used as a credit for NJ, in addition to the income being exempt from NJ tax (reciprocal agreement). The client actually told me that "her friend said........" (First time I did her...and most likely the last)

PA seems to have a lot more "complications" than other states.

I hope and don't mean to offend anyone....but I think a quick call to the PA tax dept would clear up the issue.

Maybe I'm just lucky...and although I've dealt with many "non-stellar" reps....I've never got bad advice. If the person seems unsure (and that's easy to spot) I hang up and call back.

[jklcpa]

I'll jump in on the PA bashing with you. PA returns can be a PITA with their categories of income and so many difference from the federal. PA business returns are even worse! I'll never forget the first time (as a junior many, many moons ago) when I tried to calculate the tax accrual for a PA corp under the 2 methods. I was all of these:

[SFA]

Sometimes it's ok to read the published instructions, and take them at face value. If PA is taxing out of state pensions, then they should say so in their general PA40 instructions. It is not an obscure situation.

There is nothing in their instructions about distinguishing where a pension originates.

[Guest Taxed]

That is generous of PA to not make a distinction where the pension originates.

In my state we have to worry about this reciprocal agreements they have with other states for exemption, eg. NY 20K.

[joanmcq]

I taught a course on retirement and the state taxation of pension was one of my favorite parts. Whether pensions are taxed or at how much is probably the biggest variability in state taxes. Really. The only standard I could find was that Railroad Retirement was nearly universally tax free at the state level (they must have had damn good lobbyists!).

The Tax Book All States edition says under Income Not Taxable for PA Purposes: Commonly recognized pension, old age, or retirement benefits paid after becoming eligible to retire, and retiring.

Nothing about out of state pensions or that the pensions must have been previously taxed under PA law, and being a former PA resident, I don't recall any distinction between PA earned retirement or out of state retirement funds. If necessary I can ask my brother, a CPA in PA.

[Guest Taxed]

My state does not follow the Fed depreciation rules so I cringe every time I have to do the state depreciation separately and explain to the client. The MA Sch C and Fed Sch C are different. It just drives them crazy??

[joanmcq]

CA doesn't conform to all the bonus depreciation either, so I have to weigh the benefit of accelerating depreciation vs. the pain of keeping separate schedules. ATX is now pretty good at making the adjustment, but I used to have to manually check and enter differences. In fact, I think my suggestion of 'can't you fix this?' got that function as an enhancement a few years ago.