Is the IRA Distribution Subject to EIT?
The earned income tax, or EIT, is a Pennsylvania wage tax imposed by cities and other local governments around the state. It's based on what you earn working for your employer or on your self-employment income. If you live in a city such as Pittsburgh that levies the tax, one thing you don't have to worry about is paying it on your IRA distributions.
Earned income is levied on your compensation -- which in tax-talk refers to what you actually earn through work, not money withdrawn from an IRA. That includes wages, salaries, tips, bonuses and other incentives. Freelancers and independent contractors pay EIT based on net profits from self-employment. If you're not a Pennsylvania resident but you work in the state, it's up to local government whether you pay EIT on your Pennsylvania earnings.
If you're a Pennsylvanian on active military service, the EIT doesn't apply: state law specifically exempts military pay. It also excludes interest, dividends, pensions, Social Security and capital gains. If you have to pay under the net-profits section of the EIT rules, you only report what you're paid for services or goods. If your business invests money and gets a return on investment, you don't have to pay EIT on your returns from the investment.
If you're an employee, your work-related expenses are a valid EIT write-off if your employer doesn't reimburse you. The City of Pittsburgh says work-related travel deductions such as mileage and lodging for overnight trips are a common EIT write-off. If you're self-employed, you subtract standard business expenses to determine your net profits before figuring out how much business income you pay EIT on. Any deduction acceptable for state income tax is acceptable on the EIT.
Pennsylvania's state income tax does apply to withdrawals from IRAs, SEP-IRAs, 401(k) plans and similar retirement plans. Unlike the federal code, the state tax doesn't exempt earnings you contribute to your IRA. When you start making withdrawals, you don't pay tax unless your withdrawals exceed your tax-paid contributions. If you've contributed $10,000 to your IRA and paid tax on it, say, you don't pay state tax until you withdraw more than $10,000.
A graduate of Oberlin College, Fraser Sherman began writing in 1981. Since then he's researched and written newspaper and magazine stories on city government, court cases, business, real estate and finance, the uses of new technologies and film history. Sherman has worked for more than a decade as a newspaper reporter, and his magazine articles have been published in "Newsweek," "Air & Space," "Backpacker" and "Boys' Life." Sherman is also the author of three film reference books, with a fourth currently under way.