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Robin D.
Robin D., Senior Tax Advisor 4
Category: Tax
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Experience:  15years with H & R Block. Divisional leader, Instructor
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PA Tax Law Question

Customer Question

PA Tax Law
Question
Submitted: 1 year ago.
Category: Tax
Expert:  Lane replied 1 year ago.

NPVAdvisor :

Hi, what's your question?

Customer :

I'm a PA resident.

NPVAdvisor :

K

NPVAdvisor :

Be glad to do some research for you ... I have acces to the entire PV code, as well as PA court secisions

Customer :

I will need to withdraw $50,000 out of a 401K. I understand my federal tax and penalty just not sure what I will owe the state.

NPVAdvisor :

OK, that depends on your tax bracket ... the income will simply be added to your income for PA state tax purposes

NPVAdvisor :

In PA you have a flat 3% tax... ust ooked that up ... so..

NPVAdvisor :

You'd be looking at 1500 in PA tax on that portion of your income for the year you pull it

NPVAdvisor :

Here's an excellent site that lets you estimate your PA tax: http://www.tax-rates.org/pennsylvania/income-tax

Customer :

I thought I was only sheltered federally and I already paid state tax on my 401K?

NPVAdvisor :

I'm not sure I completely understand ... If you had state taxes WITHHELD when it was distributed, then yes, you've effectively already paid that .. (what you had withheld will offset the tax, when you do your PA state taxes next year for this year)

NPVAdvisor :

ON the federal side, it really works the same way, except that there's the 10% penalty on top of having that extra income added to your income for the year, for tax purposes.

NPVAdvisor :

The reason it works that way is the money went into the plan "pre-tax," so that income was never taxed ... so when you pull it out they tax it as ordinary income ... and on the federal side they add a 10% to it as well, becuase they don't want you pulling it out before age 59 and 1/2

Customer :

I guess my confusion is....I didn't think the state was pre-taxed.

NPVAdvisor :

It isn't really pre-taxed ... most plans will allow (and some mandate) that you have state taxes WITHHELD (just like a W-2) from the distribution, then they'll give you something (a 1099 showing that money was withheld) in January of next year to use with your taxes - just like a W-2 _ to show that the money was withheld

Customer :

Thank you, I'll check out the web site as well.

NPVAdvisor :

You can ask your plan administratory whether they require that withholding ... many times there'll be a form that asks YOU how much you want withheld (as part of the distribution request form)

NPVAdvisor :

Tha'ts usually a section of the form you'll ave to fill out

NPVAdvisor :

f this HAS helped, I would appreciate a feedback rating of 3 (OK) or better … That's the only way they will pay us here.


HOWEVER, if you need more on this, PLEASE COME BACK here, so you won't be charged for another question.

NPVAdvisor :

Other questions?

NPVAdvisor :

I still don't see you coming back into the chat - I wanted to be sure you didn't have any other questions ... I'll move us to the Questions & Answer mode ... Maybe that will help ... ( We can still continue a dialogue there, just not in real-time as we can here)

NPVAdvisor :

Let me know if you need anything else

NPVAdvisor :

Lane

Expert:  Robin D. replied 1 year ago.

Hello I am a different tax expert ,

Unlike the federal income tax law, contributions to a 401(K) or contributions to other types of retirement plans are considered part of the employee's taxable compensation and are subject to withholding requirements. The contributions are treated the same, whether made inside or outside a cafeteria plan. However, when you retire and start receiving distributions, the amount you withdraw from your 401(K) plan is not subject to PA personal income tax because you already paid tax in PA when the money was contributed. You touched on this yourself when you asked about pretax.
Early withdrawals are taxed based on the cost recovery method. The cost recovery method is a way to determine how much of a distribution from a retirement plan or annuity is taxable. Under the cost recovery method, an individual "recovers" all of his or her contributions to a retirement plan, before reporting any PA taxable income.
If you recover all your contributions, and still have not reached the age of 59 1/2 then any subsequent withdrawals are taxable until you reach the age of 59 1/2.

Expert:  Lane replied 1 year ago.


Robin is correct.

I did not realize that PA contributions to qualified plans were not pre-tax.

Stand corrected, lesson learned.

Lane


Expert:  Robin D. replied 1 year ago.
I trust when you checked the website you were able to verify the information I supplied was correct.
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Robin D.
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15years with H & R Block. Divisional leader, Instructor