Pennsylvania does not tax pension income, but federal taxes still apply

Pennsylvania has no state income tax on pension distributions — money you receive from a pension plan after you retire. This means if your only income is a pension, you owe nothing to Pennsylvania. However, the federal government taxes most pensions as ordinary income, and you may owe federal tax depending on how much you receive and your other income sources.

The state exemption covers traditional pensions, military pensions, and most retirement plan distributions. It does not cover wages, investment income, or interest. If you have income from multiple sources, only the pension portion escapes Pennsylvania tax.

Key Takeaways

  • Pennsylvania state income tax does not apply to pension distributions of any amount, regardless of how much you receive each month.
  • Federal income tax still applies to most pensions, and you may owe federal tax based on your total income and filing status.
  • Military pensions, government employee pensions, and private employer pensions all receive the same Pennsylvania exemption.
  • If you have other income besides your pension — such as wages, Social Security, or investment returns — you may owe Pennsylvania tax on that income even though the pension itself is untaxed.

Which types of pensions are exempt from Pennsylvania tax

Pennsylvania exempts pension income from any source: private employer pensions, government employee pensions (state, local, or federal), military pensions, and distributions from 401(k) plans and IRAs taken after age 59½. The exemption applies to the full amount you receive, with no income limit or cap.

The exemption also covers survivor benefits paid to a spouse or dependent after a pension holder's death. If you inherit a pension and receive distributions as a beneficiary, those distributions are also exempt from Pennsylvania state tax.

Lump-sum pension payouts — when you receive the entire pension value in one payment instead of monthly checks — are also exempt. The timing and size of the distribution do not change the exemption.

Federal tax on pensions still applies in Pennsylvania

Even though Pennsylvania does not tax your pension, the federal government does. Most pension distributions count as ordinary income on your federal tax return, meaning they are taxed at your federal income tax rate based on your total income for the year.

You may be able to reduce your federal tax burden through the standard deduction (the amount of income you can earn tax-free). For 2024, the standard deduction is $14,600 for single filers and $29,200 for married couples filing jointly. If your pension income is below these amounts, you may owe no federal tax. If it exceeds the standard deduction, you owe federal tax on the amount above it.

Some pensions — particularly those from government employers — may have had taxes withheld when you started receiving payments. You can check your pension statement or contact your pension administrator to see how much has been withheld. If too much was withheld, you may receive a refund when you file your federal return.

How to report pension income on your Pennsylvania return

When you file your Pennsylvania state tax return (Form PA-40), you do not report pension income at all. You report only income that Pennsylvania taxes: wages, self-employment income, interest, dividends, capital gains, and rental income. Leave pension distributions off the form entirely.

On your federal return (Form 1040), you report pension distributions on the lines for taxable pensions and annuities. Your pension administrator sends you a Form 1099-R each January showing the amount distributed and any federal tax withheld. Use this form to complete your federal return.

If you received distributions from multiple pensions or retirement accounts, you will receive a separate Form 1099-R for each one. Add all the distributions together when reporting to the federal government.

Social Security and other retirement income in Pennsylvania

Social Security benefits receive the same Pennsylvania exemption as pensions — the state does not tax them. However, federal tax may apply to Social Security depending on your total income. If your combined income (adjusted gross income plus half your Social Security benefits) exceeds certain thresholds, up to 85 percent of your Social Security may be taxable at the federal level.

Other retirement income sources are taxed differently. Interest from savings accounts and CDs is taxable in Pennsylvania. Dividend income is taxable. Capital gains from selling investments are taxable. Only pension and Social Security distributions escape Pennsylvania tax.

What to do if you receive a pension while still working

If you receive a pension and also earn wages from a job, Pennsylvania taxes only the wages. The pension portion remains exempt. You will owe Pennsylvania tax on your wages based on your wage income alone, not on the combined total of wages plus pension.

This matters for your withholding. Your employer withholds Pennsylvania tax based on your wages. If you have a pension, you do not need to adjust your withholding to account for it, since the pension is not taxed by the state. However, you should still review your federal withholding, since both your wages and pension count toward your federal tax liability.

Frequently Asked Questions

Do I have to file a Pennsylvania tax return if my only income is a pension?

No. If your only income is a pension and you have no other Pennsylvania-taxable income, you do not have to file a state return. However, you still must file a federal return if your income exceeds the federal standard deduction, since the federal government taxes pensions.

Will my pension be taxed differently if I move out of Pennsylvania?

No. The Pennsylvania exemption applies only to Pennsylvania residents. If you move to another state, that state's tax rules apply to your pension. Some states tax pensions; others do not. Check the tax rules of your new state before you move.

What if my pension is from a government job — is it still exempt?

Yes. Government pensions from federal, state, or local employers receive the same Pennsylvania exemption as private employer pensions. Military pensions are also fully exempt from Pennsylvania tax.

Can I reduce my federal tax on my pension?

You can reduce federal tax by using the standard deduction and by ensuring the correct amount of tax is withheld from your pension payments. You can also explore whether you are may be able to access for other federal tax credits or deductions based on your age and income. Consult a tax professional for guidance specific to your situation.

If I take a lump-sum pension payout, do I owe Pennsylvania tax on it?

No. A lump-sum pension payout is treated the same as monthly pension payments — it is exempt from Pennsylvania tax. You will owe federal tax on it, and you may want to consider rolling it into an IRA to defer federal taxes, but Pennsylvania has no state tax on the amount.