If you live in Philadelphia and work in a county or city outside of Pennsylvania, you may be eligible for a city wage tax credit thanks to the 2015 U.S. Supreme Court ruling in Wynne v. Maryland Comptroller of Treasury (135 S.Ct. 1787). In the case, the highest court in America decided that it is an unconstitutional violation of the Dormant Commerce Clause for Maryland not to allow its residents to claim a credit against the local portion of its income tax. Since Philadelphia’s city wage tax structure is like Maryland’s local tax, the City of Brotherly Love has decided to allow residents to claim a credit for taxes paid to other local jurisdictions.
As of now, refunds are not available for taxes Philadelphians paid to another state. However, Pennsylvania does allow residents to take an income tax credit for taxes paid to another state.
This credit does not apply to Philadelphians working in states with a reciprocal tax agreement which require commuters to pay state income tax only in their home state. Pennsylvania has reciprocal tax agreements with New Jersey, Maryland, Ohio, Virginia, West Virginia, and Indiana.
A similar credit is allowed against Philadelphia’s business net profit tax for taxes paid to local jurisdictions outside of Pennsylvania. The net profits tax subjects 100% of a Philadelphian’s share of income from a business to the tax, regardless of where that income is earned. Businesses must file a separate Refund Petition with their net profits tax return to request a refund. As of this writing, the Philadelphia Department of Revenue has yet to update the net profits tax form to include a line to deduct the credit.
As explained on the Philadelphia Department of Revenue website, Philadelphians can take the credit for tax years 2013 through 2016 if they also paid one of the following City of Philadelphia taxes on that same income:
- Wage Tax
- Earnings Tax
- Net Profits Tax
The maximum amount of the Philadelphia city wage tax credit is the lower of either the amount paid:
- To the other local jurisdiction for income that is also taxable in Philadelphia; or
- To Philadelphia.
A Philadelphia city wage tax credit for 2016 can be claimed by filing an Annual Reconciliation of Employee Earning Tax return with the City of Philadelphia by April 18 and reporting the allowable credit on line 17. To request a refund for tax years 2013 through 2015, eligible Philadelphians must:
- Complete a refund petition form.
- Provide documentation of the taxes you paid in the other jurisdiction.
- Write “WYNNE” on the refund petition.
Requests for a 2013 refund must be filed by April 15. Generally, the deadline to request a refund is three years after the filing date of the return.
The city wage tax rate in Philadelphia is a flat 3.93% for residents and 3.50% for nonresidents who work in the city. Philadelphia does allow residents employees working in a Pennsylvania local earned income tax (EIT) jurisdiction to take a credit. Municipaility EIT rates are available on the Pennsylvania Department of Community and Economic Development website. Likewise, EIT jurisdictions generally allow residents to take a credit for local taxes paid on wages to other cities and states that are also taxable to their jurisdiction. Additionally, Pennsylvania residents pay state and federal income taxes.
If you commute to work, make sure that you don’t’ leave your hard-earned money on the table. Take advantage of this opportunity to take a Philadelphia city wage tax credit or get a refund. We are happy to help you. Please contact either Michael Sexton, CPA, CCIFP, Director – Tax Services at Michael.Sexton@MCC-CPAs.com or me at Marty.McCarthy@MCC-CPAs.com or call us at 610.828.1900.