Senate News Update
From Senator Jane Earll
October 5, 2009

State Tax News for Seniors

The Senate recently completed work on a new "Tax Amnesty" program.  Our last such program was in 1995, and it generated $93 million in delinquent tax revenues, at a cost of $10 million.  The new program could bring in as much or more revenue, which is needed in our current fiscal crisis.

The plan would authorize the Pennsylvania Department of Revenue to collect only 50 percent of the interest and no penalties otherwise assessed with unpaid taxes due as of June 1, 2009 that are designated for the General Fund, the Motor License Fund or the Liquid Fuels Tax Fund.  Amnesty would be a one-time privilege, only for those who had not participated in the previous program, and precluding future participation.  Complete tax returns for all years not filed, or amended returns for incorrect filings, would also be required.  If the taxpayer does not remain current within two years of the program’s end, the waiver of interest and penalty could be reversed.

This proposal had yet to receive final legislative approval when this column was written, but I am hopeful that the Tax Amnesty provisions will survive.

As a Senior Citizen, you are exempt from paying Pennsylvania’s Personal Income Tax (PIT) on retirement income, i.e., pension or other annuities, and Social Security.  But, you must still pay PIT on other types of income, such as the return on investments (interest, dividends), gambling (other than lottery) winnings, income from the disposition of property, and of course, compensation, if you are still employed.

Proceeds from the sale of a home owned and occupied by the taxpayer in two of the five years prior to the sale are not taxable in the Commonwealth, as long as it was used as a residence, not subject to a depreciation deduction and sold after January 1, 1998.  Further qualifications apply if the property was acquired prior to June 1, 1971.  This information is available from the PA Department of Revenue on its website (www.revenue.state.pa.us) or from the Erie office of the Department at 814-871-4491.

I bring these matters up not to remind you of an unpleasant fact of life, but in the interest of helping you to avoid a common pitfall: the "estimated tax" trap.  Most of us never find out about this little-known provision of our Tax Reform Code of 1971, but for those who do, the interest and penalty payments are shocking. 

If you obtain at least $8,000 of taxable income that has not been submitted for withholding by a Pennsylvania employer, you must determine whether estimated tax payments will be required.  If your withholding and/or tax paid for the prior tax year is 10 percent less than your current year tax return, or if the new income multiplied by the PIT rate (3.07%) would be greater than any amounts to be credited on your current year tax return, the new income would be subject to the estimated tax rule.    But if you expect to be eligible for full Tax Forgiveness, you would not have to pay estimated tax as long as you remain eligible. 

Form PA-40ESR (I) is the means of establishing the estimated payment schedule, which is supposed to occur quarterly, by April 15th, June 15th, September 15th and January 15th of the next year.  But if the income only accrues to you later in the tax year, you would have to combine quarterly payments, so that all the income is reported and total tax is paid by January 15th of the following year.  

There is a five-percent penalty for underpayment of estimated tax, and a five-percent penalty for each month that the payment is late, to a maximum of 25 percent.  Interest is computed daily for failure to pay.  Notices are eventually sent, but if you have income subject to estimated PIT this year, by the time the Department of Revenue processes a tax return from 2009 (April, 2010 or after) and determines that estimated tax payments were due during 2009, the daily interest would become overwhelming.

Thus, if you have a pending estimated tax issue or believe that you will have a need to rectify unpaid estimated tax or any other unpaid state income taxes, contact the Department of Revenue regarding Tax Amnesty.   It is in your best interest to stop the clock, as interest accrues daily, and avoid paying full interest and the penalty.  You will also be doing the Commonwealth a great service by helping to balance our budget with expected revenues and avoid tax rate increases.