ICI Opposes Double Taxation of Early Distributions

Washington, DC, June 20, 2005 - The Institute recently urged the Pennsylvania General Assembly to remove from proposed tax reform legislation a provision that would require a withholding tax on early distributions from qualified retirement plans, IRAs, and commercial annuities.

Background
The Pennsylvania General Assembly is considering H.B. 1557, comprehensive tax reform legislation that includes section 324.8, which would require withholding on early distributions from qualified retirement plans, IRAs, and commercial annuities.

Federal law and every state except Pennsylvania defer taxation on contributions to a qualified plan. If section 324.8 were enacted, Pennsylvania plan participants would be taxed twice on qualified plan contributions unless Pennsylvania taxable basis is tracked. In addition, Pennsylvania does not have a system established for taxpayers to recover over-withheld amounts.

ICI Position
In a recent letter, the Institute urged the General Assembly to remove section 324.8 from H.B. 1557 because it would require either making costly modifications to existing systems in order to track Pennsylvania taxable basis or the imposition of a withholding tax on 100 percent of early distributions. As an alternative, ICI proposes delaying enactment of section 324.8 until Pennsylvania has established a mechanism for taxpayers to recover over-withheld amounts and to educate taxpayers regarding the implications of the new withholding rules.

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