Maximizing Educational Improvement Tax Credits with Pennsylvania Grantor Trusts

How Pennsylvania’s New Tax Law Impacts Grantor Trusts and the EITC Program

With the passage of Senate Bill 815 / PA Act 64 of 2023, Pennsylvania has introduced a key change in the tax treatment of grantor trusts. This new law streamlines reporting requirements and enhances opportunities for participation in the State’s Educational Improvement Tax Credit (EITC) program. 

What is the Pennsylvania EITC Program?

The EITC program encourages businesses and individuals to support education by offering up to a 90% state income tax credit for donations to approved scholarship organizations and educational improvement organizations. These donations help fund K-12 education initiatives, private school scholarships, and pre-K programs.  The program is overseen by the Pennsylvania Department of Community and Economic Development (DCED). 

Can a Grantor Trust Participate in the Pennsylvania EITC Program?

Historically, Pennsylvania treated irrevocable grantor trusts as separate taxable entities, requiring them to file Form PA-41 and pay state taxes on income, even if the income was distributed to beneficiaries. This differed from federal tax law, which required the grantor (the trust’s creator) to report trust income on their personal tax return. 

On January 1, 2025, Pennsylvania aligned its Personal Income Tax (PIT) rules with federal regulations, treating grantor trusts as disregarded entities. Now, grantors can report trust income directly on their personal tax returns, simplifying tax reporting and enhancing opportunities for participation in the EITC program. 

How can a Grantor Trust Benefit from the EITC Program?

Under the previous law, grantor trusts making EITC donations had to contribute directly from the trust, apply tax credits on Pennsylvania Form PA-41, and claim federal deductions on the Federal Form 1041. The new law allows grantors to join Special Purpose Entities (“SPEs”) which are LLCs specifically created to manage EITC contributions.  To fully maximize participation under the old regime, both the trust and the grantor needed to make separate gifts.  Now, all the Pennsylvania tax liability will flow directly to the grantor, so a grantor can offset their tax liability from all sources of income, not just trust income. 

When the EITC program was first introduced, it was designed for businesses paying certain state taxes, including personal income tax, capital stock/foreign franchise tax, corporate net income tax, and several others. However, in 2015, the Pennsylvania legislature expanded the program to allow individual taxpayers to participate through SPEs. This made the program more accessible to individual taxpayers and broadened the definition of a “business firm” to include pass-through entities, such as SPEs. 

The new tax treatment of grantor trusts provides more flexibility and tax efficiency for individuals, i.e. grantors, looking to participate in the EITC program. By simplifying administrative requirements and expanding tax offsets, this change allows grantors to direct their tax liabilities toward education instead of state taxes. 

Maximizing Your EITC Participation

Navigating Pennsylvania’s tax credit programs can be complex, but Friends of Education simplifies the process. Through its SPEs, donors can efficiently participate in the EITC program, maximizing tax benefits while supporting educational initiatives. 

To learn more about how Friends of Education can help you leverage the Educational Improvement Tax Credit program with your Pennsylvania grantor trust, contact us at info@pataxcredits.org.