On December 14, 2023, Pennsylvania Governor Shapiro signed Senate Bill 815 into law. Senate Bill 815, now PA Act 64 of 2023, amended Sections 302 and 305 of the Pennsylvania Tax Code relating to the taxability of income received by resident and nonresident trusts.
Pennsylvania Trust Taxability
In Pennsylvania, certain income of both resident and nonresident trusts is subject to Pennsylvania’s 3.07% personal income tax. Under the Internal Revenue Code’s rules for grantor trusts, the grantor of a trust may be treated as the owner of all or part of a trust for personal income tax purposes. The federal rules subject the grantor to tax on the trust’s income and allows the grantor to report trust deductions.
Pennsylvania is the only state that does not conform to federal grantor trust rules. Under Pennsylvania law, income of trusts is taxable to trust beneficiaries to the extent the income is required to be distributed or is paid or credited to the beneficiaries.
Act 64 of 2023 Changes
Under Act 64, Section 302 is updated to make trust income taxable to the grantor of the trust or another person treated as the owner of the trust. The trust income is taxable to the grantor or trust owner regardless of whether or not the income is distributed or distributable to the beneficiaries of the trust or accumulated by the trust. Section 305 is updated to remove the beneficiary’s personal income tax liability for trust income to the extent the grantor or trust owner is taxable on the income.
While the Act 64 changes bring Pennsylvania grantor trust law closer to federal conformity, the updates to Section 302 and 305 do not apply until tax year 2025. While the changes are effective February 12, 2024, the changes apply to the tax year starting on or after the following January 1st. Unless a further update is passed in subsequent legislation, the prior grantor trust provisions will apply to tax years starting in 2023 and 2024.
Schneider Downs State and Local Tax (SALT) professionals are poised to help taxpayers with state personal income taxes, including the impact of the updated Pennsylvania grantor trust taxability laws. Please contact Stephen Worth or Mark Balistrieri with questions about Pennsylvania’s taxability of grantor trusts or other state and local tax matters.
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