Changes in the Collection of Earned Income Tax

In 2008, Pennsylvania State Act 32, which amends Act 511 of 1965 (The Local Tax Enabling Act), was passed in Harrisburg and will make significant changes to the collection of the Earned Income Tax.

One of the changes to this Act will be the collection of the Earned Income Tax at the county level rather than the local level. In most counties throughout Pennsylvania, there will be one Collector per County. However, in Allegheny County there will be four.  The locations of the new offices have yet to be determined.  Most of the changes in the collection of the Earned Income Tax will not take place until the year 2012.

However, one change will take effect this year (2009).  Under Act 32, net losses from the operation of one business can be used by a taxpayer to offset net profits from another business, but cannot be used to offset earned income.  This is an important change that should be taken into account when preparing your 2009 local Earned Income Tax Return. 

This change is also very important to tax preparers and tax advisors.  Many tax preparers use purchased software and this is advance notice to be sure that this change is incorporated.  This will eliminate the need for us to adjust incorrectly filed tax returns and send balance due notices to your clients.

Please see examples below, which are taken from the “Frequently Asked Questions” section of the PA Governor’s Center for Local Government Services webpage on Act 32:

•        If a taxpayer has a $40,000 net loss from a business selling garden supplies and $20,000 of earned income from his job at the local grocery store, the business loss may not be used to offset his earnings and so taxes will be due on the full $20,000 of earned income.
•       If a taxpayer has a net loss of $30,000 from a business selling garden supplies and a net profit of $50,000 from a business selling used cars, and earned income of $60,000 from his job as an accountant, the taxpayer’s local income tax liability will be based on $20,000 of net profits and $60,000 of earned income because the taxpayer can offset one business loss against the second business profit.   
•      If a taxpayer has a net loss of $50,000 from his garden supply business, a profit $30,000 from his used car business and income of $60,000 from his job  

We will keep the residents of Plum informed of the changes as they become available.  This information will also be posted on Plum’s website (www.plumboro.com).  If you have any questions on these changes, or any other questions pertaining to Earned Income Tax, please feel free to contact our office at 412/793-9900.