Pennsylvania does not tax pension income, but federal taxes almost always do

Pennsylvania has no state income tax on pensions, annuities, or retirement distributions. This is one of the few states with this rule. However, the federal government taxes most pension income, and you will owe federal tax unless your total income falls below the threshold where you must file. Some pensions are also subject to Medicare taxes, and a small number of federal pensions have special rules.

The practical result: you keep more of your pension check in Pennsylvania than you would in most other states, but you still file a federal return and pay federal income tax on the money unless you are below the filing threshold for your age and filing status.

Key Takeaways

  • Pennsylvania does not tax pension, annuity, or retirement plan distributions at the state level, regardless of the source or amount.
  • The federal government taxes most pension income as ordinary income, and you must file a federal return unless your income is below the filing threshold for your age.
  • If you receive a pension from the federal government, certain military pensions, or railroad retirement benefits, different rules may explore — check the specific plan.
  • Medicare tax (1.45 percent) applies to some pension distributions, particularly those from employer plans, and you may owe estimated federal tax quarterly.
  • Your W-2P form from the pension administrator shows how much federal tax was withheld; if too little was withheld, you may owe when you file.

What Pennsylvania's pension tax exemption covers

Pennsylvania exempts all income from pensions, annuities, and retirement plan distributions from state income tax. This includes traditional IRAs, 401(k) plans, 403(b) plans, defined-benefit pensions, and annuities purchased from insurance companies. The exemption applies regardless of how much you receive or whether you are still working.

The exemption also applies to distributions from Roth IRAs, though Roth distributions are usually not taxable at any level. If you receive a lump-sum distribution from a pension plan, that entire amount is exempt from Pennsylvania tax. If you roll over a pension into an IRA or another plan, the rollover itself is not taxed in Pennsylvania.

Federal tax on pension income and filing requirements

The federal government taxes pension income as ordinary income at your marginal tax rate. You must file a federal return if your income exceeds the threshold for your age and filing status. For 2024, a single person age 65 or older must file if their income is $20,550 or more; a married couple filing jointly where at least one spouse is 65 or older must file if their combined income is $26,950 or more. These thresholds change each year.

Your pension administrator sends you a Form 1099-R showing the gross amount distributed and the federal tax withheld. If your pension plan withheld too little federal tax, you will owe the difference when you file. If too much was withheld, you receive a refund. You report the taxable amount on your federal return on Form 1040, line 5a (for IRAs) or line 5b (for pensions and annuities).

When you may owe estimated federal tax

If your pension does not have enough federal tax withheld, or if you have other income sources, you may owe estimated federal tax in quarterly installments. The IRS requires estimated tax if you expect to owe $1,000 or more when you file your return. You can adjust the withholding on your pension by filing Form W-4P with your pension administrator.

To avoid penalties, estimated tax is due on April 15, June 15, September 15, and January 15. If you are unsure whether you need to pay estimated tax, the IRS Estimated Tax Worksheet on Form 1040-ES walks you through the calculation. Many retirees adjust their W-4P withholding instead of paying quarterly, which is simpler.

Special rules for federal pensions and military service

Certain federal pensions have different federal tax treatment. If you receive a pension from the Civil Service Retirement System (CSRS), the portion of your pension that represents your own contributions is not taxed federally, but the employer portion is. If you receive a pension from the Federal Employees Retirement System (FERS), the entire pension is taxable federally.

Military pensions are fully taxable federally, with one exception: if you are a combat-related disabled veteran receiving disability compensation from the Department of Veterans Affairs, you may exclude that portion from federal tax. Railroad retirement benefits have a special calculation and are not treated as ordinary pension income. If you receive any of these pensions, your Form 1099-R will show the taxable amount, and you should verify it against your plan documents.

Medicare tax on pension distributions

Most pension distributions are not subject to Medicare tax (the 1.45 percent tax that funds Medicare Part A). However, if you are still working and receiving a pension from an employer plan at the same time, or if you receive certain types of distributions, Medicare tax may explore. This is rare and usually only affects people who continue working past retirement age at the same employer.

Your Form 1099-R will show if Medicare tax was withheld. If you believe Medicare tax was incorrectly withheld, contact your pension administrator or the IRS at 1-800-829-1040 to discuss your situation.

How to report pension income on your Pennsylvania return

You do not report pension income on your Pennsylvania state return. Pennsylvania has no state income tax form for pension income. You file only your federal return. If you receive a letter from the Pennsylvania Department of Revenue asking about pension income, it is usually a notice that they received a copy of your Form 1099-R and are confirming that you do not owe state tax — you can respond by stating that Pennsylvania does not tax pensions.

Keep copies of your Form 1099-R and your federal return for your records. If you have questions about whether a specific distribution is taxable in Pennsylvania, you can contact the Pennsylvania Department of Revenue at 717-787-8201, though the answer will always be that pensions are not taxed in the state.

Frequently Asked Questions

Do I have to file a federal return if I only have pension income?

Only if your pension income exceeds the filing threshold for your age and filing status. For 2024, a single person age 65 or older with only pension income must file if the pension is $20,550 or more. Even if you do not have to file, filing may be worthwhile if federal tax was withheld, because you would receive a refund.

Can I move to Pennsylvania to avoid state tax on my pension?

Pennsylvania does not tax pensions regardless of where you lived when you earned them. If you move to Pennsylvania from another state, your pension income is not taxed by Pennsylvania going forward. However, your former state may still tax the pension if you were a resident when you earned it — that depends on the other state's rules, not Pennsylvania's.

What if I receive both a pension and Social Security?

Pennsylvania does not tax either. Federally, Social Security may be partially taxable depending on your total income, but Pennsylvania has no tax on Social Security either. You report both on your federal return, and the IRS determines if any Social Security is taxable.

Is my pension taxed if I roll it over to an IRA?

A direct rollover (pension administrator to IRA) is not taxed. If you take a distribution and roll it over yourself within 60 days, the distribution is still not taxed in Pennsylvania, but federal tax may have been withheld at the time of distribution. Report the rollover on your federal return to show it was not taxable income.

Do I owe Pennsylvania tax if I work part-time and receive a pension?

No. Pennsylvania does not tax the pension income. You may owe Pennsylvania income tax on your wages from the part-time work, but the pension itself is always exempt from Pennsylvania tax.