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An Explanation on State List Comparisons

I have received a letter from Berkheimer stating that what was reported on my Commonwealth of Pennsylvania Return differs from what I reported to them.  I have questions on why this took place, they are: Why did the state provide this to my tax collector? Why should my state and local earnings match? And what do I do now?

 

Why do we perform the state list comparison process?

As a contractual requirement and/or appointment by the Tax Collection Committees under Act 32 regulations, we are obligated to perform a state list comparison as part of the audit process to verify the accuracy of taxpayer returns.

 

Why did the state provide this information to your tax collector?

Part of the agreements between the PA Department of Revenue and the PA Department of Education requires that the Dept. of Revenue 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.

 

Why should my local earnings match my state earnings?

In 2003, the Pennsylvania 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.
So from 2003 forward, what appears on a taxpayers PA-40 form as taxable earnings should also be reported on the local return.

 

What should I do now?

First – Don’t panic!! There are a few reasons that there could be a legitimate reason for the discrepancy, some that result in no additional tax due and others that may. The purpose of the letter is to try to determine if one exists and if it does, to allow you, the taxpayer, to tell us so.  Some of the reasons that they do not match are as follows:

The following reasons ARE taxable:

  1. You took a distribution from a Retirement account (IRA, Roth IRA, 401k, 403K) that was considered to be an “Early Distribution” for which an exception did not exist. Whether the distribution is considered an early distribution or not can be determined by looking at the 1099-R for the year in question and looking for a Code 1 in box 7. If there is Code 1 in box 7, the distribution is considered to have been taken prior to the legal age to do so without penalty (59 ½ yrs. of age). If you have done so, you are taxed by the Commonwealth of Pennsylvania based on the Cost Recovery Method (total distribution – your contributions to the plan = taxable income). The state considers the portion taken attributed to what your employer contributed to your plan and the gain on the deposits made, as “earned income” for state tax purposes. Since it is considered taxable to PA, it is to be included as income locally as well.
  2. You utilized the Local Wage Box on your W-2 instead of the State wage box. There are a number of reasons, prior to tax year 2013, that your employer may not have withheld on all of your taxable state wages. So if you relied on the Local box when filing and your State wages were higher, that is where the discrepancy came from.  You are taxable on your full taxable wages for each year you are a resident of the jurisdiction(s) tax is levied for.
  3. You served an Active Duty Military assignment in the Commonwealth of Pennsylvania in the tax year in question. Although you were on Active Military duty the Commonwealth considers income for duty served in state as being taxable for state purposes, and due to this fact that same income is taxed locally as well. There is legislation under consideration that may change this beginning in tax year 2016, but for now it is taxable.

 

If you do find that you owe the taxes or a portion of those shown on the letter, you can submit the payment shown. If you need time to pay you may contact us to establish a payment plan to do so.

 

The following reasons are NOT taxable and you simply need to provide explanation to their origin:

  1. You had income from SUB-CHAPTER S corporation(s). This type of income is considered to be investment income which is taxable as such to the state, but is not taxable locally. Unfortunately, it is reported on the PA-40 form in the same location as Net Profits earned from taxable business activities.
  2. You received income from the lease of your property to a Marcellus Shale drilling operation, or for an easement for use of a portion of your property for a similar operation. Unless you are taking an active role in the exploration process, this income is NOT earned income and is also considered investment income. Unfortunately, it too is reported on the same line as taxable income to the state and then reported to us as such.
  3. You reported your spouse’s income on the PA-40 form as part of a joint filing and we do not have them connected to your social security number on our system. While the state has a joint return that combines joint income (PA-40 form), the local level does not. At the local level both spouses can be listed on a joint return, but their income cannot be combined. Since the PA-40 form is a joint return (both incomes combined for filing purposes), all of the income reported to us by the PA Department of Revenue is associated with the 1stsocial security number on the state return. If you have never filed a joint local return and we do not have your social security number associated with another on our files, it is assumed to be all that 1st taxpayer’s income.  If this is the case you simply need to provide us their information so that we can verify that the income and payments received equal that of the state report.
  4. You resided in the named school district 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 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 asking for the explanation of the difference.
  5. You 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.
  6. You worked in the City of Philadelphia and had city wage tax withheld on your wages and failed to file the annual return with your tax administrator showing that the taxes paid there covered your local tax liability. If this is the case, it will appear that you reported no income and/or taxes paid when the comparison is done. In this instance you simply need to file for the year in question showing that is the case.

 

In each of the 6 scenarios listed above, you simply need to provide us with the appropriate explanation and necessary supporting document(s) so that we can update our records accordingly.

If you wish to respond to your State List Comparison letter electronically, please click here.