Pennsylvania - Retirement Income

In Pennsylvania, if the distribution code on Form 1099-R Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. shows as "7" for normal distribution, then the distribution amount will not transfer to the PA-40 form or be included in gross income on the state return. If the distribution code shows as a "1" or "2" for an early withdrawal, then the amount will transfer to the PA-40 and be included in gross income on the state return.

If the taxpayer feels that none of this income should be taxable in PA, an adjustment can be made to the taxable amount on Pennsylvania Schedule W-2S Part B Miscellaneous Compensation to reflect the correct PA taxable amount. Enter zero in Column G of the W-2S Part B (do NOT use the Delete key or the Space bar as this will automatically calculate the Column F Adjusted Plan Basis).

The taxpayer should not have to ask for a new 1099-R, but should enter it in the program as it appears on their paper copy and then make the adjustment as mentioned previously.

To enter this adjustment in the program:

  1. From within your TaxAct return (Online or Desktop), click State to expand, then click Pennsylvania (or PA). On smaller devices, click in the upper left-hand corner, then click State.
  2. Click Income in the Pennsylvania Quick Q&A Topics menu to expand, then click Miscellaneous compensation (Schedule W-2S).
  3. Continue with the interview process to enter all of the appropriate information.
  4. Click + Add Schedule W-2S to create a new copy of the form or click Edit to review a form already created.
  5. Scroll down to answer all applicable questions, then click Save & Close.

Note. There are situations in which some or all retirement income should be taxed in PA. The code entered in Box 7 of Form 1099-R will determine the taxability on the PA return. You will want to verify whether the code in Box 7 of your paper 1099-R matches that which was entered into the program. If the code was a "1" or "2," this would indicate an early distribution.

Pennsylvania does tax early distributions in certain situations.

Additional Information

Per Pennsylvania Personal Income Tax Return PA-40 Instructions, on page 12:

Code 1 & 2 Early Distribution

This distribution is taxable for PA purposes, unless: (1) your pension or retirement plan was an eligible employer-sponsored retirement plan for PA tax purposes; and (2) you retired after meeting the age conditions of the plan or years of service conditions of the plan. If your plan was not an eligible employer-sponsored retirement plan, or if you have not attained the age or years of service required under the plan to retire, you must determine the PA-taxable amount of your distribution. You must use the cost recovery method to determine this amount. See Page 9 for additional information.

Note. If you are not sure whether your plan was an eligible retirement plan under PA tax law, ask your plan administrator.

On page 9:

Cost Recovery

PA law does not permit deductions or exemptions for contributions to retirement plans, investments in annuities, mutual funds, money market funds, and other personal contributions, even when deducted or exempt for federal purposes. Therefore, Pennsylvania will not tax your distributions or the payments you receive until you have recovered an amount equal to your contributions. Maintain your records of your contributions. If you receive an early taxable distribution from a retirement plan, and you do not have records of your contributions, consult your plan administrator.

Note that any link in the information above is updated each year automatically and will take you to the most recent version of the document at the time it is accessed.