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Pennsylvania Now Recognizing Irrevocable Grantor Trusts

For many years, Pennsylvania has been the only state that has not recognized irrevocable trusts as grantor trusts under Internal Revenue Code 671-679. For tax preparers that typically work on Pennsylvania fiduciary income tax returns, this disconnect between federal law and Pennsylvania law is a well-known fact. In these cases, a federal fiduciary income tax return (1041) would typically be prepared as a grantor trust and all associated tax paid on the grantor’s federal individual income tax return, as the owner of the trust. For Pennsylvania, a non-grantor state fiduciary income tax return (PA-41) would be filed, and tax paid by the trust itself, or potentially the trust beneficiaries.

In December 2023, Pennsylvania Governor Josh Shapiro signed a Bill (Pennsylvania senate Bill 815) that incorporates the federal grantor trust rules into Pennsylvania’s income tax law. This law went into effect on February 12, 2024 and for tax years beginning January 1, 2025, if an irrevocable trust is considered grantor for federal purposes, it will also be grantor for Pennsylvania purposes. The unification in the laws is a welcome development for tax preparers who have been navigating this difference.

Trustees, grantors, and beneficiaries of Pennsylvania resident trusts, or nonresident trusts with Pennsylvania sourced income, should be careful to take note of this change and make adjustments accordingly. For example, the grantor may need to increase their estimated payments for 2025 to account for the trust income being taxed on their individual return. Additionally, a trustee could be in the habit of making estimated payments for the trust. For tax year 2025, these estimated would no longer be necessary and 2024 tax overpayments should not be applied to tax year 2025.

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