Pennsylvania Retirement Income (2024)¶
Quick Reference¶
Complete Exemption¶
Pennsylvania does NOT tax retirement income:
Fully exempt: - Social Security benefits - Pensions (government and private) - IRA distributions (traditional and Roth) - 401(k), 403(b), 457 distributions - Annuity payments - Military retirement pay - Railroad retirement benefits
Tax rate on retirement income: 0%
No age requirement: Exempt regardless of age
No income limit: Exempt regardless of total income
Why Retirees Choose PA¶
Tax advantages: - Zero tax on retirement income - Low 3.07% rate on other income - No estate tax or inheritance tax on transfers to spouse or minor children - Property tax/rent rebate program for seniors
Result: Pennsylvania is tax-friendly for retirees with pension/IRA income
Details¶
Social Security Benefits¶
PA treatment: - Completely exempt from PA income tax - Not reported on PA-40 - No taxable portion
Federal vs. PA: - Federal: up to 85% may be taxable - PA: 0% taxable - Significant PA advantage for retirees
Pension Income¶
All pensions exempt:
Private pensions: - Employer-funded defined benefit plans - Distributions from qualified plans - Periodic and lump-sum distributions
Government pensions: - Federal civil service pensions - State government pensions - Local government pensions - Military retirement (see below)
Foreign pensions: - Pensions from foreign employers - Generally exempt if meet definition
IRA and 401(k) Distributions¶
Traditional IRA distributions: - Fully exempt from PA tax - No age requirement - Early distributions (before 59½) also exempt
Roth IRA distributions: - Exempt (already tax-free federally)
401(k) and 403(b) distributions: - Fully exempt from PA tax - Lump-sum distributions exempt - Periodic distributions exempt
457 plan distributions: - Government 457(b) plans: exempt - Non-government 457(f) plans: exempt
SEP-IRA and SIMPLE IRA: - Exempt like traditional IRA
Annuities¶
Commercial annuities: - Payments from purchased annuities: exempt - Both principal and earnings portions
Private annuities: - Payments under private annuity agreements - Generally exempt if structured properly
Deferred annuities: - Distributions exempt when received
Military Retirement¶
Military pension: - Fully exempt from PA tax - All service-connected pensions - Disability pensions - Survivor benefits
Federal vs. PA: - Federal: military pensions taxable - PA: military pensions exempt - Significant benefit for military retirees in PA
Railroad Retirement¶
Tier I benefits: - Equivalent to Social Security - Fully exempt
Tier II benefits: - Equivalent to private pension - Fully exempt
Supplemental annuity: - Fully exempt
What's NOT Exempt (Common Confusion)¶
Still taxable for PA:
Wages and self-employment after retirement: - If work part-time in retirement - Wages taxed at 3.07% (Class 1) - Self-employment taxed at 3.07% (Class 4) - Subject to state and local EIT
Investment income: - Interest: taxed at 3.07% (Class 2) - Dividends: taxed at 3.07% (Class 3) - Capital gains: taxed at 3.07% (Class 5) - Rental income: taxed at 3.07% (Class 6)
Nonqualified deferred compensation: - If not from qualified retirement plan - May be taxable as compensation
HSA distributions: - If not for qualified medical expenses - Taxable as ordinary income
Part-Year Resident Treatment¶
Moved to PA during year:
Retirement distributions after becoming PA resident: - Exempt from PA tax - Even if from contributions made in other state
Retirement distributions before becoming PA resident: - Not subject to PA tax - PA only taxes residents' income while resident
Moved from PA during year:
Retirement distributions while PA resident: - Exempt from PA tax
Retirement distributions after moving: - Not PA income (no longer resident)
Federal and PA Comparison¶
Federal taxation: - Social Security: up to 85% taxable - Pensions: fully taxable - 401(k)/IRA: fully taxable - Roth IRA: tax-free
PA taxation: - Social Security: 0% taxable - Pensions: 0% taxable - 401(k)/IRA: 0% taxable - Roth IRA: 0% taxable
Result: PA taxable income significantly lower than federal for retirees
Conversion Strategies¶
Roth conversions in PA:
Advantage: - Convert traditional IRA to Roth - PA: conversion is distribution, exempt from PA tax - Federal: pay federal tax on conversion - Future Roth distributions: exempt from both federal and PA
Example: - Taxpayer has $100,000 traditional IRA - Converts to Roth IRA - Federal tax: ~$22,000 (22% bracket) - PA tax: $0 (exempt) - Net savings vs. high-tax state: significant
Planning opportunity: - PA residents can do Roth conversions with less state tax cost - Only pay federal tax on conversion - Future growth is tax-free
Property Tax/Rent Rebate Program¶
Additional benefit for seniors:
Eligibility: - Age 65 or older - Widows/widowers age 50+ - Disabled age 18+
Income limits (2024): - Maximum income: $35,000 (if homeowner) - Maximum income: $15,000 (if renter) - Half of Social Security excluded from income calculation
Rebate amounts: - Up to $650 for homeowners - Up to $650 for renters
Application: - File PA-1000 (Property Tax/Rent Rebate Claim) - Deadline: June 30 following tax year - Automatic extension to December 31
Multi-State Considerations¶
PA vs. high-tax states:
Retiree moving from NJ: - NJ: taxes pensions (with some exclusions based on income) - PA: does not tax pensions - Significant savings for high-income retirees
Retiree moving from NY: - NY: taxes pensions (with $20,000 exclusion) - PA: does not tax pensions - Savings increase with pension amount
Retiree moving to FL: - FL: no state income tax at all - PA: no tax on retirement income, 3.07% on other income - FL better if significant investment income - PA competitive if mainly pension/IRA income
Common Errors¶
Reporting retirement income: - Error: Including pension on PA-40 - Correct: Do not report pension on PA-40
IRA distributions: - Error: Reporting traditional IRA distributions - Correct: Not taxable for PA, do not report
Early distributions: - Error: Thinking early IRA distribution taxable (federal penalty) - Correct: PA exempts even early distributions (no PA tax or penalty)
Rollover vs. distribution: - Rollover: IRA to IRA, not taxable federal or PA - Distribution: IRA to taxpayer, federal taxable, PA exempt - Do not confuse the two
Planning for PA Residents¶
Maximize tax-free income: - PA retirees should consider larger traditional IRA distributions - No PA tax on distributions - Only federal tax applies - Better than dividend/interest income (taxed by PA at 3.07%)
Roth vs. traditional in PA: - Traditional IRA: tax deduction now, exempt distribution in PA (only federal tax later) - Roth IRA: no deduction now, exempt distribution federal and PA - Traditional may be better for PA residents due to deduction now + PA exemption
Pension vs. deferred comp: - Qualified pension: exempt from PA tax - Nonqualified deferred comp: may be taxable - Structure compensation to maximize pension
Citations¶
Pennsylvania Tax Code: - 72 P.S. § 7303(a)(4) - Retirement income exclusion - 72 P.S. § 7303(a)(7) - Social Security exclusion - 72 P.S. § 7306 - Exclusions from income
Regulations: - 61 Pa. Code § 101.6(c) - Retirement income - 61 Pa. Code § 103.15 - Pension and annuity exclusion
PA Department of Revenue: - PA Personal Income Tax Guide (REV-466) - Income Subject to Tax (REV-415, p.3) - https://www.revenue.pa.gov/
Property Tax/Rent Rebate: - PA Act 1 of 2006 - Property Tax/Rent Rebate Program - Form PA-1000 and instructions
Forms: - PA-40 - Individual Income Tax Return (retirement income NOT reported) - PA-1000 - Property Tax or Rent Rebate Claim - PA-40 Schedule A through H (retirement income excluded)
Guidance: - REV-1723 - Common Level Ratio Real Estate Valuation Factor - Property Tax/Rent Rebate Program guidelines