PA state tax capital loss question?

Question

PA IRS sent me a letter with their own figures changed from my tax report, with the result of a lower amount of refund to me. All of differences comes from that they remove the deduction of capital loss (Line 5 on PA-40 form) and make my total taxable income higher.

I asked the staff of PA IRS on phone, and she told me that it is simply because a PA tax payer can not report capital loss for deduction (or you can say they will not let you deduct it even though you report the capital loss), while if you have capital gain then you must report it and therefore pay a higher tax because of the additional earning.

I was never aware of this regulation, if it does exist instead of the staff giving wrongful information. So I wonder whether there is really such a tax law for PA state tax 2006? Any link to the specific law? Would people who are familiar with PA state tax laws please answer this question please? Thank you very much in advance.

Thank for the link to PA IRS website. I read the PA-40 instructions "AGAIN". And, especially from the descriptions for net capital gain (loss), I still do not see any lines saying your net capital loss can not be considered while your gain must be taxed.

Still looking for people's expertise guidance.

Thank you very much.

Answer 1

Yes, that's correct. Look at the instructions on line 9 of the form itself, the total line. It says "add only the positive income amounts from....DO NOT ADD any losses reported on lines 4, 5 or 6.

Also see page 14 of the instructions where it says "You may not offset income in one PA income class with a loss in any other PA income class." - since that's how the law is written, that's why you can't deduct the losses - you'd be offsetting income from another class (line on the form). And page 15, third paragraph where it says "PA Taxable Income". And page 19, the instructions for total on line 9, where it says again "Add only the positive income amounts from Lines 1c
through 8. Do not add, subtract, or take losses into
consideration."

All that sounds pretty clear. Why is it that way? Because that's how the state legislature wrote the law.

Answer 2

Capital Gains are taxed at a special rate for federal income tax purposes. That is not always the case for state income tax purposes. Each state makes that determination independently. If you state does not have a capital gains rate the gain is generally taxed at the standard rate.

Answer 3

That's what it looks like. I have included a link to the PA dept of revenue attached.