I have previously written that the Pa. Department of Revenue does not consider “income in respect of a decedent” to be subject to Pa. income tax, but the Department may be changing its position on the taxation of IRD, because the instructions to Form PA-40 for 2017 were different from the instructions for 2016.
- The instructions for PA-40 (for individuals) now includes the following statement about types of income that are NOT taxable: “Inheritances, death benefits, and income in respect of a decedent (IRD) as defined for federal income tax purpose for purposes of compensation (NOTE: IRD may be subject to the PA PIT in a class of income other than compensation).” The “for purposes of compensation” is new, as is the “note” in parentheses. But even the parenthetical says that IRD other than compensation “may” be subject to tax, and not “is” subject to tax.
- The PA-40 instructions also contain a cross-reference to the PA Personal Income Tax Guide, the on-line version of which was last revised on 8/24/2012, and continues to include the statements quoted above.
- More importantly, there is no similar change to the instructions to Form PA-41, for estates and trusts. Those instructions continue to state that compensation received post-death is not taxable, which is consistent with the PA-40 instructions. The only other reference to IRD is in instructions on withholdings, which refers to “income in respect of a decedent (not taxable for estate or trust income tax purposes, but includable in the value of an estate for inheritance tax purposes).”
There has therefore been a change to the instructions to Form PA-40, but no change to instructions for Form PA-41, and (more importantly), no change to the PA Personal Income Tax Guide. Whether the change in the PA-40 instructions represents the beginning of a change in policy, or a errant deviation, still isn’t clear.
This information has been added to the article “Pennsylvania Taxation of Income in Respect of a Decedent,” along with information on the income tax treatment of annuities that continue to be payable after death.