padirectfile   Help - Filing Instructions

PA Schedule W-2S - Part B

Miscellaneous Compensation from 1099-MISC or 1099-R

Use this Schedule to report:

If you have a 1099-R, and there is a Code 7 in Box 7 you have a “Normal distribution,” Under PA Personal Income Tax law, a normal distribution is not taxable if:

1. Your pension or retirement plan was an “eligible Pennsylvania retirement plan”, and
2. You have met the retirement age or years of service requirement (as applicable) under such plan.

If you or your plan does not meet the two requirements above, the taxation of this distribution is determined under the cost recovery method.

What is the adjusted plan basis?
The adjusted plan basis is the nontaxable portion of the distribution. It is that portion of the distribution that was contributed by the taxpayer, in which PA Personal Income Tax has already been paid.

What is an eligible Pennsylvania retirement plan?
A qualified plan has four characteristics:

1. The plan is reduced to writing and has been communicated to the participants.

2. The plan establishes eligibility requirements for separation of service or a combination of old age or infirmity, and long-continued service.

3. The plan provides for payments to be made at regularly recurring intervals after their separation from service by retirement which continues at least until death. An option for a lump sum payments or payments does not disqualify the retirement nature of the plan as long as the other provisions are provided.

4. The plan does not permit the distribution of program benefits to any employee until termination of employment except for incidental disability benefits or the return of the employee’s previously taxed contributions and income or gains if the employee is required to contribute to the pension plan.

If the pension program is a SEP, a Keogh, a federally qualified tax sheltered annuity program or a tax deferred custodial account, an additional provision must be included in the written provisions to be a qualified pension program. It provides that program benefits cannot be paid before retirement, death, disability, separation from service, unforeseeable emergency or attaining the age of 59 ½ without a substantial penalty for early withdrawal.

What is the Cost Recovery Method?
The Cost Recovery Method is a way to determine how much of a distribution from a retirement plan or annuity is taxable. Under the cost recovery method, an individual "recovers" all of his or her contributions to a retirement plan, before reporting any PA taxable income.

For example, if you contributed $200 a month for 80 months to a qualifying pension plan, you contributed $16,000 to the plan. If you took a lump sum distribution of $20,000 before you were qualified to retire, only $4,000 would be taxable. Based on the cost recovery method, the first $16,000 of the distribution was your own money, leaving only $4,000 as taxable.

If you recover all your contributions, and still have not reached the age of 59½, then any subsequent withdrawals are taxable until you reach the age of 59 1/2.

Other tips for reporting Miscellaneous Income.
For each source of income, enter the Employer Identification Number from each 1099 and the amount of taxable compensation.

If filing a joint return, indicate whose income is being reported on each line using a “T” for the taxpayer or an “S” for spouse.

The total amount of compensation will be carried forward to your return.

Return to Help Index

Previous Topic    Next Topic