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Lev, Tax Advisor
Category: Tax
Satisfied Customers: 29576
Experience:  Taxes, Immigration, Labor Relations
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I made an early withdrawal from an IRA in 2012 and I did not

Customer Question

I made an early withdrawal from an IRA in 2012 and I did not included this in my local earned income tax calculation. I paid the federal and state, but was under the impression that for the local tax, it was not necessary to pay.
My local tax collector is now sending a letter saying in accordance with ACT 166 of 2002, the portion of early distribution that represents the employer contribution is taxable for purposes of the earned income tax. This same amount is taxable for purposes of state income tax. It sounds like someone who doesn't know what they are talking about. The 1099-R has nothing on it that shows what the employer contribution was and there is no way to prove that.
Can you please let me know the real answer? Are they out of line saying I need to pay local earned income tax on an early withdrawal from an IRA that I received a 1099-R for?
Submitted: 1 year ago.
Category: Tax
Expert:  Lev replied 1 year ago.

Pennsylvania taxpayers must report all income distributed their IRA in excess of their contributions on their state tax return.

The same is true for local taxes.
That is - your original contribution is distributed tax free, but earning and employer's contribution (if funds were rolled over from 401k or other retirement account) - will be taxable.

You are correct - form 1099R usually doesn't report your original contribution - and that is your responsibility to keep track for that amount.

Please refer to Personal Income Tax Bulletin 2008-1 for additional IRA tax information, including details regarding employer sponsored plans, investment accounts and inherited IRAs.

How do I know if the amount on my 1099-R is taxable on my PA Personal Income Tax Return?

To determine if the amount you received is taxable in Pennsylvania, review boxes 1 through 3 (the amount you received or your distributions) and the PA PIT treatment of box 7 (the codes that will help determine the taxability of your distribution). The Federal Codes contained in box 7 of Form 1099R include:

Code 1 & 2 Early distribution. This distribution is taxable for PA purposes, unless: (1) your pension or retirement plan was an eligible plan for PA PIT purposes, and (2) you retired after meeting the age conditions of the plan or years of service conditions of the plan. If your plan was not an eligible plan, or if you have not attained the age or years of service required under the plan to retire, you must determine the PA taxable amount of your distribution. You must use the cost recovery method. This means that you previously paid PA income tax on your contributions to the plan. Therefore, Pennsylvania will not tax your distributions until you have received (recovered) an amount equal to your previously taxed contributions. Consult your plan administrator as to your previously taxed contributions to the eligible Pennsylvania retirement plan.