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Pennsylvania Updates Legislation Related to Taxation of Grantor Trusts

December 19, 2023 3 Min Read Alerts, State and Local Tax Services
Thomas M. Frascella
Thomas M. Frascella Director, Tax Strategies, State & Local Tax Group Leader

On December 14, 2023, Governor Josh Shapiro signed a bill authorizing Pennsylvania to conform to the federal tax treatment of grantor trusts.

Historically, Pennsylvania treated income received by a grantor trust as taxable at the trust level. The state treated the grantor trust as if it was an individual separate and apart from the grantor who created the trust. Pennsylvania’s treatment of grantor trusts for purposes of personal income taxes created a disconnect when it came to the efficient administration of tax at both the grantor level and grantor trust level.

The federal government and almost all state governments that impose a personal income tax treat any income received by the grantor trust as if it were the income of the grantor. Because of the way that Pennsylvania historically treated grantor trusts, the income received by the grantor trust was taxed at the trust level, unless the income was distributed to the beneficiaries. Income distributed to the beneficiaries was included in the calculation for distributable net income of the trust and taxed at the beneficiary level.

One of the single biggest issues with Pennsylvania’s approach of taxing the grantor trust was with resident credits. The resident credit for taxes that are paid to another state is intended to create tax fairness and provide a taxpayer with relief from paying taxes on the same income twice. Because Pennsylvania did not respect the federal rules related to the taxation of grantor trusts, the income received by the grantor trust was typically subject to the Pennsylvania Personal Income Tax without the benefit of receiving a credit for taxes that were paid on the income in other states. The main driver of that disconnect was the fact that the income reported to other states was taxed at the grantor level, while the income reported to Pennsylvania was reported at the beneficiary level. Because the income distributions went to the beneficiaries, who were not taxable in the other states, the income was basically subject to state income tax twice.

The new law will take effect for tax years beginning on or after January 1, 2025.  Effective for tax year 2025 and forward, the classes of income received by a resident and non-resident trust and sourced to Pennsylvania will be taxable to the grantor to the extent that the grantor is treated as the owner of the trust.

If you have any questions about this or any other state and local tax matters, please do not hesitate to contact our State and Local Tax team.

Information contained in this alert should not be construed as the rendering of specific accounting, tax, or other advice. Material may become outdated and anyone using this should research and update to ensure accuracy. In no event will the publisher be liable for any damages, direct, indirect, or consequential, claimed to result from use of the material contained in this alert. Readers are encouraged to consult with their advisors before making any decisions.

Contact the Author

Thomas M. Frascella

Thomas M. Frascella

Director, Tax Strategies, State & Local Tax Group Leader

State and Local Tax Services Specialist

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