PA Local Income Tax (Berkheimer)

[stilllurking]

I know this may be a long shot, but I'm wondering if anyone else has come upon this situation.

In PA, Berkheimer is the tax authority that covers the state and when I was filing on their site, it is saying that the 1099-R I received for the backdoor Roth is taxable at its full amount (according to the Rep I spoke with). The issue I have with the site is that the on my 1099-R, I have the following:

Box 1 - amount of conversion
Box 2a - same as above
Box 2b - Taxable Amount Not Determined and Total Distribution are both selected "X"
Box 4 - 0.00
Box 5 - blank
Box 7 - 02
IRA/SEP/SIMPLE - selected "X"
Box 11 - blank
Box 14 - 0.00
Box 15 - blank
Box 16 - blank

When I enter the data as above, it says: "State distribution is required when Taxable Amount was not determined. This amount can be found in Part B Column G on your PA 40 W2-S."

Can it be possible that even funding a tIRA and the subsequent conversion to Roth, that the amount is taxable (without taking a deduction) on the original amount?

The Rep feels like the 1099-R is incorrect and should be coded G.

Any guidance is appreciated.

[obafgkm]

In PA, Berkheimer is the tax authority that covers the state...

Sorry, I cannot help, but to clarify, there is no one authority which covers Pennsylvania for local tax collection. It depends on where one lives in the state and with which servicer the municipality contracts.

For example, I live in central Pennsylvania. I file my local income taxes through Keystone Collections Group. Previously I filed through Capital Tax Collection Bureau before my municipality changed its servicer.

[Jill07]

Hi - Is this for Pa Local Earned income tax? If so, are you required to report a 1099-R? I didn't think you were.

[redmaw]

I assume by local, you mean state, because I'm pretty sure localities in PA are only authorized to tax wages (it also matches the form numbers you are quoting. So everything below applies to state taxes.

From https://www.revenue.pa.gov/FormsandPubl ... ev-636.pdf

Must all distributions from IRAs be reported for PA personal income tax purposes?
Yes. All IRA distributions should be reported on PA Schedule W-2S, Wage Statement Summary, whether or not some or all of the distributions are taxable. If a taxpayer receives distributions before he/she reaches 59 ½ years of age, some
of the distributions may be taxable. The cost recovery method is used to determine the portion of distributions to be included in income.

also

Are there differences between Pennsylvania and federal tax rules on roll-over contributions and plan conversions?
Yes...
The conversion of a traditional IRA to a Roth IRA is generally not taxable. That is, monies transferred from a traditional IRA to a Roth IRA via conversion (whether by a trustee-totrustee transfer or a roll-over within 60 days) are generally not subject to Pennsylvania personal income tax. However,
any amounts transferred from the traditional IRA that are not put into the Roth IRA, be it by federal income tax withholding or otherwise, are subject to Pennsylvania personal income tax. In such a situation, basis is allocated pro-rata between the taxable distribution and the non-taxable conversion. If there is a partial rollover/conversion, the basis in the traditional IRA must be allocated prorata between the traditional IRA and the Roth IRA.

Based on that reading, I don't think you owe any additional taxes, but I believe the W-2s form will calculate what portion of the IRA distribution is taxable. Not that code 2 is "early distribution, exception applies". I am not sure PA allows exceptions, but if it does I assume that is covered on the w-2s (i've never used one). Note code G is "Direct rollover of a distribution to a qualified plan...). THat is what my 1099-R is coded, but that's for a direct transfer from 401k to roth IRA...not sure if you did direct, or a 60-day rollover.

[redmaw]

I perused a little, here is form w2-s: https://www.revenue.pa.gov/FormsandPubl ... -40w2s.pdf

The instructions are included, based on my reading, you will report the same number on column E adn F, and subtract the two for column G...resulting in no additional PA income, or tax.

[water2357]

The 2020 PA-40 indicates that there is no W-2S form for 2020. The rules have changed. As for distribution from IRAs, you may want to review PA Tax Bulletin 2008-01 found here https://www.revenue.pa.gov/GeneralTaxIn ... fault.aspx

just scroll down the page a bit. Also, the instructions for PA-40 have information on how PA taxes rollovers/direct transfers from Traditional IRAs to Roth IRAs. If you are 59 1/2 there is generally no problem with converting traditional IRA monies to a Roth IRA, nothing is taxed.

However, if you are not considered "retired", not 59 1/2 then you need to dig deeper to be sure you don't owe tax, i.e. that you followed all the rules. From PA-40 instructions for 2020

• Roth IRA Rollover
You do not have to pay PA tax on the difference between the amount distributed from your traditional IRA and your previous contributions:
1. If you rolled over the entire withdrawal directly (trustee to trustee) from the traditional IRA to the Roth IRA; or
2. If you withdrew from the traditional IRA and within 60 days invested the entire (100 percent) amount you received into a
Roth IRA

CAUTION: If federal tax is withheld from a rollover distribution, the amount of federal tax withheld must also be reimbursed into the new IRA account in order for the rollover to be considered nontaxable for PA PIT purposes. See 1099-R Filing Tips beginning on Page 13 for additional information.
IMPORTANT: For detailed information on Pennsylvania taxation of distributions from IRAs, please review Tax Bulletin 2008-01 on
the department’s website, www.revenue.pa.gov.

ALSO from PA-40 for 2020 1099-R Filing Tips

4. If any Form(s) 1099-R included with the return are reporting a conversion of a traditional IRA to a Roth IRA (or vice versa) with distribution Code 1 in Box 7 of the 1099-R, you may be eligible to report the amount as nontaxable income when a direct transfer from trustee to trustee occurs and/or the when the entire distribution from the original IRA account (including taxes withheld) is paid into the new IRA account within 60 days of the date of the distribution. In such cases, the distribution is not taxable for PA personal income tax purposes. If the distribution is not a direct transfer from trustee to trustee, or the entire distribution is not paid into the new IRA account as a result of the conversion of the original IRA account, the distribution is taxable for PA personal income tax purposes to the extent the amount not transferred into the new IRA exceeds the adjusted basis (contributions less any previous distributions) of the original IRA before conversion. Include the taxable amount of any
distributions in Line 1a of the PA-40.

[water2357]

Since you have code 2 in Box 7, it would appear the following applies, again from 2020 PA-30 1099-R Filing Tips

2. If any Forms 1099-R with distribution Code 2 in Box 7 are included with the return, you must determine if the distribution is from an eligible employer-sponsored retirement or pension plan for PA tax purposes. Eligible plans must: be in writing; include provisions for separation of service, old age or infirmity, and long-continued service; provide for payments at regularly recurring intervals after separation from service until death or an option for a lump sum payment; and does not permit the distribution of program benefits to any employee until termination of employment except for incidental disability benefits or the return of the employee’s previously taxed contributions and income or gains if the employee is required to contribute to the pension plan. If these conditions are met, the distribution is not taxable for PA personal income tax purposes. If the plan does not meet these conditions, the distributions are taxable for PA personal income tax purposes to the extent they exceed the contributions to the plan using the cost recovery method. If the plan is not a PA eligible plan, include the taxable amount in Line 1a of the PA-40. A written copy of the plan should be obtained from all employers in the event the department requests verification that the plan is a PA eligible plan.

[water2357]

That last post should state "PA40" in the first line.

[chiliagon]

I assume by local, you mean state, because I'm pretty sure localities in PA are only authorized to tax wages (it also matches the form numbers you are quoting. So everything below applies to state taxes.

From https://www.revenue.pa.gov/FormsandPubl ... ev-636.pdf

Must all distributions from IRAs be reported for PA personal income tax purposes?
Yes. All IRA distributions should be reported on PA Schedule W-2S, Wage Statement Summary, whether or not some or all of the distributions are taxable. If a taxpayer receives distributions before he/she reaches 59 ½ years of age, some
of the distributions may be taxable. The cost recovery method is used to determine the portion of distributions to be included in income.

also

Are there differences between Pennsylvania and federal tax rules on roll-over contributions and plan conversions?
Yes...
The conversion of a traditional IRA to a Roth IRA is generally not taxable. That is, monies transferred from a traditional IRA to a Roth IRA via conversion (whether by a trustee-totrustee transfer or a roll-over within 60 days) are generally not subject to Pennsylvania personal income tax. However,
any amounts transferred from the traditional IRA that are not put into the Roth IRA, be it by federal income tax withholding or otherwise, are subject to Pennsylvania personal income tax. In such a situation, basis is allocated pro-rata between the taxable distribution and the non-taxable conversion. If there is a partial rollover/conversion, the basis in the traditional IRA must be allocated prorata between the traditional IRA and the Roth IRA.

Based on that reading, I don't think you owe any additional taxes, but I believe the W-2s form will calculate what portion of the IRA distribution is taxable. Not that code 2 is "early distribution, exception applies". I am not sure PA allows exceptions, but if it does I assume that is covered on the w-2s (i've never used one). Note code G is "Direct rollover of a distribution to a qualified plan...). THat is what my 1099-R is coded, but that's for a direct transfer from 401k to roth IRA...not sure if you did direct, or a 60-day rollover.

I think the Philadelphia School Income tax is a local PA tax that serves as a counterexample to the claim that localities in PA are only authorized to tax wages. (My knowledge of tax law is poor, so I could be mistaken about this. Still, I suspect I am correct.) To be clear, my comment is irrelevant for the OP.

[arcticpineapplecorp.]

I do taxes for VITA in PA. In my locality only earned income is taxable at the local level, not unearned income (but I thought that's for all municipalities in PA). I did a conversion back in 2009 and only owed federal tax. Why? Because it was only originally tax deferred on the federal level (not at the state or local) when the money was originally contributed. When I withdraw monies from tax deferred in retirement (barring tax law changes) those monies are only taxed at the Federal, not the state or local level.

Did you do the following?:

"To do the backdoor Roth, you:

(1) Make a nondeductible (i.e. taxed and not deducted) contribution to a Traditional IRA.
(2) Then convert the Traditional IRA to a Roth IRA"

If so, there should have been no deductions on income on the money contributed.

A code G is for a rollover to another qualified plan. But as the below says:

Rollover (Code G)

Distribution code G on your 1099-R indicates that your WRS benefit was rolled over to another qualified plan. In most cases, your 1099-R will show $0.00 as the taxable amount in Box 2a, unless you rolled over your distribution to a Roth IRA. The amount you rolled over will not be subject to taxes until you start taking money from your IRA/qualified plan. However, rollovers to Roth IRAs are subject to income taxes in the year the rollover is made. Please talk to your tax advisor or the IRS if you have questions about the income tax implications for rollovers to a Roth IRA.

source: https://etf.wi.gov/benefits/taxes-and-m ... tributions

[stilllurking]

Thanks everyone for your help. I haven't gone through all suggestions yet but will.

I do taxes for VITA in PA. In my locality only earned income is taxable at the local level, not unearned income (but I thought that's for all municipalities in PA). I did a conversion back in 2009 and only owed federal tax. Why? Because it was only originally tax deferred on the federal level (not at the state or local) when the money was originally contributed. When I withdraw monies from tax deferred in retirement (barring tax law changes) those monies are only taxed at the Federal, not the state or local level.

Did you do the following?:

"To do the backdoor Roth, you:

(1) Make a nondeductible (i.e. taxed and not deducted) contribution to a Traditional IRA.
(2) Then convert the Traditional IRA to a Roth IRA"

If so, there should have been no deductions on income on the money contributed.

A code G is for a rollover to another qualified plan. But as the below says:

Rollover (Code G)

Distribution code G on your 1099-R indicates that your WRS benefit was rolled over to another qualified plan. In most cases, your 1099-R will show $0.00 as the taxable amount in Box 2a, unless you rolled over your distribution to a Roth IRA. The amount you rolled over will not be subject to taxes until you start taking money from your IRA/qualified plan. However, rollovers to Roth IRAs are subject to income taxes in the year the rollover is made. Please talk to your tax advisor or the IRS if you have questions about the income tax implications for rollovers to a Roth IRA.

source: https://etf.wi.gov/benefits/taxes-and-m ... tributions

I did the backdoor Roth as you mentioned above. The 1099-R is for the money coming out of the tIRA if I'm not mistaken and it is correctly shown as 2 vs G in box 7.

Just for clarity, this question is not arising from the state income tax return, but rather local earned income tax return that many localities in PA that is administered by Berkheimer Tax Innovations hab-inc.com.

Hi - Is this for Pa Local Earned income tax? If so, are you required to report a 1099-R? I didn't think you were.

Thanks Jill07. It had asked about 1099-Rs so I assumed they all needed to be put on there.

Mind my ignorance, but does any 1099-R count as "earned income" if it's coming from a retirement account?

This is just a backdoor Roth conversion and I'm under 59.5.

[water2357]

Any W-2 I've gotten in PA has the PA State income box on it reporting the same amount of income as the Local income box. The Local municipality has always applied income tax at the local rate to all monies contributed to a 401K, just like the PA State does. And that income on the W-2 is "earned income".

Anything that a 401K account "earns" beyond those contributions from "W-2 earned income" is investment earnings. I have never seen investment earnings classified as "earned income". It's true that "investment earnings" on 401K accounts or IRA accounts (Trad and ROTH) may be taxed when withdrawn or rolledover/transferred if you are not retirement age or don't follow all the rules for rollovers/transfers. However, those "investment earnings" are not "earned income".

Are you in Philadelphia? If not, and it's some other PA municipality, I would think that they are just taxing all your "W-2 earned income" when you earn it like the State does, so the municipality should not be taxing that money again. Maybe some municipalities in some cases tax the "investment earnings" like the State does, but they do not tax investment earnings in my municipality when you follow the State rules for tax free rollovers/direct transfers/conversions, whether among Employer plans or individual IRAs.

And the only mention of 1099 forms on my Local Tax forms are for net profits and losses from a business.

Here's the definition of "other earned income" in my municipality in PA
OTHER TAXABLE EARNED INCOME: Include income, from work or services performed, which has not been include
on line 1 or 5. Do not include interest, dividends or capital gains

Line 1. is W-2 income
Line 5. is the net profit or loss from a Business

Interesting how different PA municipalities tax residents.

[stilllurking]

Any W-2 I've gotten in PA has the PA State income box on it reporting the same amount of income as the Local income box. The Local municipality has always applied income tax at the local rate to all monies contributed to a 401K, just like the PA State does. And that income on the W-2 is "earned income".

Anything that a 401K account "earns" beyond those contributions from "W-2 earned income" is investment earnings. I have never seen investment earnings classified as "earned income". It's true that "investment earnings" on 401K accounts or IRA accounts (Trad and ROTH) may be taxed when withdrawn or rolledover/transferred if you are not retirement age or don't follow all the rules for rollovers/transfers. However, those "investment earnings" are not "earned income".

Are you in Philadelphia? If not, and it's some other PA municipality, I would think that they are just taxing all your "W-2 earned income" when you earn it like the State does, so the municipality should not be taxing that money again. Maybe some municipalities in some cases tax the "investment earnings" like the State does, but they do not tax investment earnings in my municipality when you follow the State rules for tax free rollovers/direct transfers/conversions, whether among Employer plans or individual IRAs.

And the only mention of 1099 forms on my Local Tax forms are for net profits and losses from a business.

Here's the definition of "other earned income" in my municipality in PA
OTHER TAXABLE EARNED INCOME: Include income, from work or services performed, which has not been include
on line 1 or 5. Do not include interest, dividends or capital gains

Line 1. is W-2 income
Line 5. is the net profit or loss from a Business

Interesting how different PA municipalities tax residents.

Thanks water. I'm not in Philadelphia not do I work there.

I'll read over the Berkheimer site again in reference to the 1099-Rs to get clarification.

I appreciate everyone's help.

[marcopolo]

Mind my ignorance, but does any 1099-R count as "earned income" if it's coming from a retirement account?

This is just a backdoor Roth conversion and I'm under 59.5.

Are you sure it asked about 1099-R, and not other types of 1099?

You do need to report things like self employment income reported on 1099s.
But, i do not believe any PA municipality taxes income on 1099-R's.

[B'Falls_JT]

It's been a few years since we've had applicable income, but if I recall correctly...

1) You only report "earned income" from your W2s or 1099s (in our case, it was a 1099-MISC). Income related to retirement accounts was not reported as it is not earned income.
2) Also, confirming that this is not PA state taxation. It is tax due to your local municipality (you must select a specific PSD code).

JT

[stilllurking]

Mind my ignorance, but does any 1099-R count as "earned income" if it's coming from a retirement account?

This is just a backdoor Roth conversion and I'm under 59.5.

Are you sure it asked about 1099-R, and not other types of 1099?

You do need to report things like self employment income reported on 1099s.
But, i do not believe any PA municipality taxes income on 1099-R's.

Thanks marcopolo.

In re-reading the document again, this is what is says:
"1099-R
The 1099-R enables a taxpayer to report taxable distributions from annuities, profit-sharing plans, retirement plans, individual retirement accounts (IRAs), insurance contracts and/or pensions."

I presume the operative words here are "taxable distributions" and since the backdoor Roth conversion isn't taxable on Federal and PA State, then it can be left off. I also have a 1099-R for my mega backdoor Roth in-plan conversions which, since it is also not taxable, I will remove.

It's been a few years since we've had applicable income, but if I recall correctly...

1) You only report "earned income" from your W2s or 1099s (in our case, it was a 1099-MISC). Income related to retirement accounts was not reported as it is not earned income.
2) Also, confirming that this is not PA state taxation. It is tax due to your local municipality (you must select a specific PSD code).

JT

You are correct JT and others upstream about the "earned income" distinction here.

This site is great. Thank you all very much. I can finally close 2020 taxes.

[grabiner]

In re-reading the document again, this is what is says:
"1099-R
The 1099-R enables a taxpayer to report taxable distributions from annuities, profit-sharing plans, retirement plans, individual retirement accounts (IRAs), insurance contracts and/or pensions."

I presume the operative words here are "taxable distributions" and since the backdoor Roth conversion isn't taxable on Federal and PA State, then it can be left off.

The distribution may be partly taxable, if you had any earnings in the IRA between contribution and conversion. (I paid tax on $1 from my backdoor Roth this year.)

[stilllurking]

In re-reading the document again, this is what is says:
"1099-R
The 1099-R enables a taxpayer to report taxable distributions from annuities, profit-sharing plans, retirement plans, individual retirement accounts (IRAs), insurance contracts and/or pensions."

I presume the operative words here are "taxable distributions" and since the backdoor Roth conversion isn't taxable on Federal and PA State, then it can be left off.

The distribution may be partly taxable, if you had any earnings in the IRA between contribution and conversion. (I paid tax on $1 from my backdoor Roth this year.)

Thanks grabiner.

This goes back to my confusion at the beginning in thinking that all 1099-Rs needed to be reported. Posters have clarified that it's "earned income" that would be taxed by Berkheimer. The portion that was taxable equates to less than $40 so it wouldn't round up to dollar to move the needle. Though, that income isn't earned either.

[crit]

Ok, so the answer is to leave the 1099R generated from a backdoor Roth off the Berkheimer forms?

I've been struggling with this for years now, and I think I even called them at some point, but still have no answer.

But, won't the mismatch between your reporting (no 1099R} and other reporting ( fed tax records, bank submission) create a problem? Or do they not have access to those reports?

[stilllurking]

Ok, so the answer is to leave the 1099R generated from a backdoor Roth off the Berkheimer forms?

I've been struggling with this for years now, and I think I even called them at some point, but still have no answer.

But, won't the mismatch between your reporting (no 1099R} and other reporting ( fed tax records, bank submission) create a problem? Or do they not have access to those reports?

I'm leaving it off though it was on last year and I'm not sure how I got it to work out with no taxes.

Since they are taxing earned income and the backdoor Roth is not earned income, plus after tax funds, I’ll explain it then.

I spoke with someone there last Monday and didn’t get anywhere aside from them saying that my 1099-R was incorrectly coded.

[crit]

Well, thanks for posting this question, at least it'll come up in the Google search I do every year now

[AllLongMoney]

Hi, I am going through the headache of dealing with incompetence from these people. I did a back door Roth contribution with $0 pro rata, because my Trad IRA is always zero before my contribution, and converted with $0 earnings. After 3 phone reps the third said to leave the 1099-R off of the form. I then emailed to confirm and they said code 2 in box 7 is taxable. It is unequivocally not. Tax attorneys have said this is blatantly wrong. Has anyone else had issues reconciling leaving the 1099-R off and the state reporting them after a few years? I know there’s a class action against Berkheimer brewing as well for them neglecting the tax code. I hope it goes through.

[stilllurking]

Hi, I am going through the headache of dealing with incompetence from these people. I did a back door Roth contribution with $0 pro rata, because my Trad IRA is always zero before my contribution, and converted with $0 earnings. After 3 phone reps the third said to leave the 1099-R off of the form. I then emailed to confirm and they said code 2 in box 7 is taxable. It is unequivocally not. Tax attorneys have said this is blatantly wrong. Has anyone else had issues reconciling leaving the 1099-R off and the state reporting them after a few years? I know there’s a class action against Berkheimer brewing as well for them neglecting the tax code. I hope it goes through.

The way I've dealt with it is not putting it on since Berkheimer is taxing earned income, of which this 1099-R is not.

[TSR]

You guys are apparently able to get onto the Berkheimer website in the first place, which is better than I've been able to do. I have tried to reset my password a half dozen times and they never send me the verification email. It's an incredibly frustrating process. If anyone has solved this problem I'd love to hear it! (Not trying to derail this thread -- just frustrated at this company!)

[ponzu]

Hi, I am going through the headache of dealing with incompetence from these people. I did a back door Roth contribution with $0 pro rata, because my Trad IRA is always zero before my contribution, and converted with $0 earnings. After 3 phone reps the third said to leave the 1099-R off of the form. I then emailed to confirm and they said code 2 in box 7 is taxable. It is unequivocally not. Tax attorneys have said this is blatantly wrong. Has anyone else had issues reconciling leaving the 1099-R off and the state reporting them after a few years? I know there’s a class action against Berkheimer brewing as well for them neglecting the tax code. I hope it goes through.

I've done backdoor roth and regular roth conversions many times and never included 1099-R info with my local tax return (filed on the hab-inc website). Now, PA does require a copy of the 1099-R with the state tax return even if it isn't taxable; they want a photocopy included with a paper return, and when filing electronically on the MyPath site they have you manually recreate the 1099-R. State/local tax authorities have never contacted me about anything.