Does Pennsylvania Tax Military Retirement?
Understand how Pennsylvania's tax laws apply to military retirement income and the specific steps required for accurate state tax return filing.
The tax rules governing military retirement income can differ substantially across the country, influencing where a military retiree might choose to live. These variations can have a meaningful impact on a retiree’s annual net income.
Pennsylvania’s Tax Exemption for Military Retirement Pay
Pennsylvania provides a full exemption for military retirement pay from its state personal income tax. This applies to retirement pay received from any branch of the U.S. Armed Forces that is based on years of service.
The exemption is not limited by the retiree’s age or the amount of retirement pay received. It is a complete exclusion of this income source from the state’s definition of taxable compensation.
This tax benefit is rooted in Pennsylvania’s broader rules regarding retirement income. The state exempts distributions from most government and employer-sponsored retirement plans for residents who have reached retirement age. Military retirement pay falls under this protective umbrella, ensuring that those who have served are not taxed by the state on their earned pensions.
Tax Treatment of Other Military Related Income
Beyond standard retirement pay, Pennsylvania also exempts other forms of military-related income from state taxation. Military disability retirement pay, which is provided to veterans for injuries or sickness resulting from active service, is not taxable in the state. This aligns with the federal government’s treatment of these payments, which are also excluded from federal taxable income.
Payments from the Survivor Benefit Plan (SBP) are also not subject to Pennsylvania’s personal income tax. When a military retiree passes away, the SBP provides a continuous annuity to a surviving spouse or other eligible beneficiaries. These payments are considered non-taxable income within Pennsylvania.
Federal Tax Rules and State Reporting
While Pennsylvania exempts military retirement pay, it is important to distinguish this from federal tax obligations. The Internal Revenue Service (IRS) generally considers military retirement pay to be taxable income at the federal level. The primary exception to this federal rule is military disability retirement pay, which is typically not included in federal gross income.
When filing a Pennsylvania state tax return, Form PA-40, retirees must account for this difference in tax treatment. Taxpayers should report their federally taxable income as a starting point. From there, they can subtract the amount of their military retirement pay on the Pennsylvania Schedule W-2S, which is used to report compensation. This subtraction is specifically entered on the line designated for “Nontaxable military pay.”