Community Basics

The answers to your questions are shown below.  It's best to complete your New York (NY) nonresident return first, the prepare the Pennsylvania (PA) return last. If you already started the return note the income and tax liability from the NY return so that you can enter the necessary information on your PA return.

1. Is there Pennsylvania inheritance tax on this and do we need to file the inheritance tax form? It is not from a Pennsylvania source.   
   • No, he was not a Pennsylvania (PA) resident, no inheritance tax would be filed in PA.
2. Is this inheritance taxed in Pennsylvania as income and does it need to be reported on our Pennsylvania tax return? 
   • Yes, you must also report the K-1 on your PA return.  PA will give you credit for taxes paid to another state on the same income (see details below).
3. Because this inheritance is a 401K distribution, does that change the way it is treated in Pennsylvania?
   • Yes, see the information next.  NOTE: A lump-sum distribution from an employer-sponsored retirement plan made prior to the normal retirement age or length of service requirement under the plan for disability is taxable to the extent it was not previously taxed. Payments made to the participant’s estate or designated beneficiary as a consequence of the participant’s death are not taxable.  PA Personal Income Tax Instruction (see page 27)
   • See the screen image below and select the right category for tax exempt treatment.
4. If this inheritance is not taxed on our Pennsylvania return, how do we indicate that in Turbo Tax?
   • You will tax the income from the K-1 and take a credit as indicated above - details below.

The credit for taxes paid to another state on the same income is used on your resident state because they do not want you to pay taxes twice on the same income.  As the resident state all worldwide income must be included.

The credit for tax paid to another state on the same income will be the lesser of:

1. the tax liability actually charged by the nonresident state, OR
2. the tax liability that would have been charged by your resident state