Historically, Pennsylvania’s income taxation of grantor trusts differed from federal tax treatment. That changed as a result of Pennsylvania Senate Bill 815 (S.B. 815), which aligned Pennsylvania treatment of grantor trusts with federal treatment (and into step with the majority of other states). This change will alleviate tax headaches for many clients with Pennsylvania-taxed trusts.
Prior to tax years beginning in 2025, Pennsylvania did not recognize grantor trusts. Instead, the trust was treated as a separate taxpayer from the grantor for Pennsylvania tax purposes. Meanwhile, for federal income tax purposes the trust was disregarded and treated as though the grantor directly owned the trust assets.
This disconnect between Pennsylvania and federal tax law caused a grantor trusts to file a Pennsylvania income tax return and pay associated income taxes while for federal tax purposes, the trust filed a grantor letter return and the grantor was responsible for payment of federal income taxes and reporting trust attributes. This caused results that surprised many grantors, such as the inability to enjoy Pennsylvania-deductible losses against the grantor’s income.
This difference also caused problems in estate planning. For example, a sale of assets to a grantor trust would not be a taxable event for federal income tax. However, the sale would be a taxable event for Pennsylvania purposes, resulting in Pennsylvania income tax recognized by the grantor and basis adjustment.
Now that S.B. 815 is in effect for 2025, grantors and trustees of grantor trusts need to review their estimated Pennsylvania income tax payments. Estimated Pennsylvania income tax payments by grantor trusts may be discontinued. However, grantors will need to account for the additional tax which will be reported on the grantor’s tax return for the 2025 tax year, including adjusting estimated payments. The estimates for first quarter, 2025 are due April 1, 2025, and should be made on Form PA-40 ES (I) or electronically through myPATH. The Estate and Trust estimated payment form, Pennsylvania Form REV-413, has been updated for 2025 to reflect the changes implemented by S.B. 815.
Overall, the change of tax treatment is a positive one for taxpayers and tax preparers. Attention to how the change affects tax reporting this spring can avoid unpleasant surprises next spring.