PA 41; Schedule NRK-1; nonresident beneficiary

[JeffCPA]

I am preparing a PA-41 estate tax return for a estate that is considered a resident of PA.   There are two beneficiaries who are residents of MD.  Therefore, they are to receive Schedule NRK-1, reporting to them, as non-residents of PA, there respective shares of estate income.   At least I think I have this part right so far.

The software if I am completing things correctly is showing their income on Schedule NRK-1, but is also calculating the amount of PA income tax owed, and saying that tax is withheld.   This seems odd to me. 

Example.   NRK- for particular beneficiary that lives in MD shows income from Estate or Trusts line 1 in section II of $32,533.   Then on line 2 of Section II, "PA nonresident tax withheld" the amount is $999.

Must the Executor of the estate actually withheld PA income tax for this, and pay that into PA Dept of Revenue?  If so, what are the mechanics of that, and how is that done.   All seems rather odd.  

[sjrcpa]

Maybe.

What kinds of income do you have?

[JeffCPA]

Great questions.   The decedent was a resident of PA.  So, the estate is a resident of PA.   Decedent owned a 403b account at Fidelity.  Unfortunately he did not name beneficiaries for the account.    So, the proceeds of that Fidelity 403b account were paid to the decedent's estate.   So, the Estate received about $500,000 or so of 403b distributions, which are now being distributed to beneficiaries according to the terms of the will. 

I did not ask this question, but I am also struggling with the notion of whether this 403b distribution paid to his estate is really considered taxable income.   If it were paid out directly to beneficiaries, if he had named them, I believe it would have been coded on a 1099R with a 4, and not be taxable.    

I am treating it as taxable income on PA-41, line 6, "estate or trust income" distributed by the estate to the various beneficiaries. 

[Accountant-Man]

If the decedent when alive had received a 403b distribution, the PA individual would not owe an PA income tax as long as decedent was at least 60 years old.

There should be zero taxable income to PA for this.

[JeffCPA]

I don't understand your response.   I might not have explained fact pattern properly.  

John Doe owned a 403b account at Fidelity.   John Doe died.  John Doe did not name any beneficiaries to receive his 403b account at Fidelity.    

The entire 403b account, after John Doe died, valued at about 500k, was distributed to the estate of John Doe.   It was not distributed to an individual.    The 500k was distributed to Estate of John Doe. 

Fidelity has issued a 1099R form to the Estate of John Doe reporting the 500k of distributions.    Those distributions paid ot the estate are in turn, being distributed to a variet of beneficiaries pursuant to the terms of John Doe's will. 

are you saying the distributions from the estate to these beneficiaries are not considerd taxable income?  If so, please explain why you think that?

[sjrcpa]

He's saying not taxable by PA.

At the federal level it is raxable.

[Accountant-Man]

PA taxes all compensation when earned, so deferred compensation(401k, 403b, 457b) during the year is not taxed federally but PA taxes it each year. Those are therefore after-tax contributions.

When receiving distributions, federal taxes all distributions when received SINCE FEDERAL NEVER TAXED CONTRIBUTIONS NOR EARNINGS ON THE RETIREMENT ACCOUNT.

Not PA. Since PA taxed the contributions when earned, PA doesn't tax the distributions. They also do not tax the earnings that are part of the distributions.

Estate 1041s are merely income tax returns that tax income that would otherwise be taxed to people on 1040s, but since the TP died, somebody else has to pay the income tax on taxable income.

Many other states tax retirement income(not after-tax monies, though), like NJ. PA does not, except when distributions are made before age 60 and the interest from annuities.

Is box 16-1 on 1099-R completed?

[Accountant-Man]

Another part of the answer: estate distributions made before the end of the tax year(probably fiscal year) and/or within 2 1/2(?) months of year-end are taxable to the recipients/beneficiaries of the money.

That way the estate, with a much higher tax bracket, can pass the income through to the lower taxed benes. IE, estate with $100,400 of taxable income owes $34,011.

If the 1099-R has federal withholding, that can be refunded, but not passed through to the benes. Benes would have to pay tax then wait for the estate's refund.

Not naming beneficiaries on retirement accounts is probably the most costly mistake a TP can make.

(ps I am not taking into consideration any charities named as beneficiaries.)

[JeffCPA]

Hello Accountant man.   Thanks for your replies and explanation.   I understand your explanation and the general comments about PA and taxation of retirement plan distributions.  The PA PIT (Personal Income Tax Guide) Guide, which I have referred to in my own practice over the years many times, also has a detailed chart comparing Federal treatment of 1099R distribution codes (Box 7 on 1099R) to PA treatment of those same codes.    The PIT Guide makes it very clear that any 1099R distribution, coded "4", which is a death distribution is not taxable.   I am well familiar with that in the PA income tax return situation for indivdiduals and PA-40.    However, I was second guessing myself on this when it comes to PA-41 and an estate being issued a 1099R, with a "4" death distribution in Box 7.  

The tax treatment is no different for an estate, than it would be if issued to an individual for PA income tax purposes.   At least that is what I am understanding you to be saying.   If an estate receives a 1099R reporting a 403b distribution, coded in Box 7 with the number, "4" (death distribution) then that is not taxable income to the estate--at the PA 41 level, and it is also not taxable income that has to be passed through to the individual beneficiaires on PA-RK1.     Do you agree with that?