5 Major Differences Between Federal and Pennsylvania State Income Taxes

The nature of our federalist government, with federal and state governments sharing the power to govern, means that the taxes that we are required to pay at each level can actually differ drastically.

Every year you pay both your state and federal income taxes (hopefully!), but you could be missing out on some important financial benefits when it comes to your taxes if you do not understand some of the major differences between the two.

In this blog we have outlined five specific differences between rules governing your federal income taxes and Pennsylvania state income taxes. If you have questions or need assistance with tax issues at either level, please contact Morgan Maxwell today.

1) Retirement Income

Federal: At the federal level, any distributions you receive in the form of retirement income, such as that which comes from a 401(k) or an IRA, is entirely taxable. You will be required to pay income tax on the entire amount of the retirement benefit you received during that taxable year.

Pennsylvania: Pennsylvania is one of the most generous states in the country when it comes to taxing its retirees. If you are 59 ½ years of age or older, and you have reached retirement based on years worked or age, then Pennsylvania does not tax your retirement plan distributions. They are completely tax-exempt.

2) Social Security

Federal: It is possible for one’s Social Security benefits to be tax-exempt at the federal level if they are the taxpayer’s only source of income, but there are some circumstances where the income one collects from Social Security could be taxed. The determining factors depend on amount of income and tax-exempt interest, and 50% or 85% of your Social Security benefits could be includible in gross income if it is not exempted.

Pennsylvania: The State of Pennsylvania exempts all Social Security benefits from taxation.

3) Bond Interest

Federal: If you hold US savings bonds and you collect interest on the bonds, then the interest you collected could be considered taxable income at the federal level, with some exceptions. If you use the income for higher education purposes and your income is below a certain level, then the bond interest will be tax-exempt.

Pennsylvania: If you own a bond that is held in the State of Pennsylvania, then the interest on that bond will be tax-exempt. However, if you live and Pennsylvania and own a bond that is held in another state, the income from that bond will be taxable on your state income taxes.

4) Unemployment

Federal: The federal government generally taxes most unemployment benefits received at both the federal and state levels, though there are some exceptions. One can choose to have federal income taxes withheld from their unemployment benefits.

Pennsylvania: You do not have to pay any state income tax on your unemployment benefits in Pennsylvania.

5) 529 Plan Deductions

Federal: No deductions are allowed at the federal level for state 529 college savings plans.

Pennsylvania: Residents of Pennsylvania may deduct up to $14,000 in contributions to 529 plans (per beneficiary) from their taxable income at the state level. That number doubles to $28,000 for married couples filing jointly. This can significantly lower the amount of income taxes you are required to pay in PA.

It is important that you know the differences between federal and state income tax treatments so that you can utilize the tax benefits that may be offered by one entity and not the other. Call Morgan Maxwell today for assistance with both your Pennsylvania state and federal income taxes.

Written by E. Morgan Maxwell

E. Morgan Maxwell

Since beginning his own firm, Mr. Maxwell has continued a tax-law oriented practice encompassing a wide range of transactions, planning and dispute resolution. His dispute resolution experience includes involvement at all levels of the Internal Revenue Service (Examinations, Appeals, Collections, Office of Professional Responsibility, the U.S. Tax Court), the Pennsylvania Department of Revenue, the Tax Litigation Section of the Pennsylvania Attorney General’s Office, Pennsylvania Commonwealth Court, Common Pleas Court and local taxing jurisdictions in southeastern Pennsylvania.

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