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Tool | September 2014

State-by-State Guide to Taxes on Retirees

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Pennsylvania

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The Bottom Line
Map of Pennsylvania

TAX-FRIENDLY

The Keystone State shows its Quaker roots and extends a friendly hand to retirees. It is one of the most generous states in the nation when it comes to offering income tax exclusions on a wide variety of retirement income. Pennsylvania does not tax Social Security benefits or any eligible Pennsylvania public or private pension plan. Neither does it nick distributions from 401(k)s, IRAs, deferred-compensation plans or other retirement accounts. Property taxes can be steep in some communities, though.

State Sales Tax

6%, but food, clothing, textbooks, heating fuels, and prescription and nonprescription drugs are exempt. Philadelphia has a local sales tax of an additional 2%, and Allegheny County (Pittsburgh's home county) adds a local sales tax of 1%.

Income Tax Range

Pennsylvania has a flat rate of 3.07%.

Social Security

Benefits are not taxed.

Exemptions for Other Retirement Income

Retirement income is not taxed after age 59 1/2 if the person has reached retirement, based on years of service or age. Distributions aren't taxed from eligible retirement accounts, including employer-sponsored deferred-compensation plans, 401(k) plans and IRAs. Income not taxed includes Railroad Retirement benefits, United Mine Workers' pensions, military pensions and civil-service annuities.

Property Taxes

Property taxes are levied by local governments (counties, municipalities and school districts). The tax cannot exceed $30 per $1,000 on the assessed value of the property without special permission from the courts. A state realty transfer tax of 1% is collected when properties are transferred from one owner to another, and Pennsylvania counties also impose a realty transfer tax at varying rates.

Median property tax on the state's median home value of $164,700 is $2,223, according to the Tax Foundation.

Tax breaks for seniors: Homeowners and renters 65 or older and widows or widowers 50 or older who live on limited incomes are eligible for rebates of paid property tax or rent. A maximum standard rebate of $650 (supplemental rebates can boost the amount to $975 for homeowners with particularly high tax burdens) is available through this Property Tax/Rent Rebate Program. To qualify, annual household income must not exceed $35,000 ($15,000 for renters). Fifty percent of Social Security payments and 50% of Railroad Retirement benefit payments are excluded from eligibility income.

Inheritance and
Estate Taxes

The Pennsylvania inheritance tax is calculated as a percentage of the value of the estate transferred to beneficiaries. The amount is determined based on the relationship of the heir to the decedent and the decedent's date of death. The tax rate is 4.5% for transfers to direct descendants (lineal heirs), 12% for transfers to siblings and 15% for transfers to other heirs (except charitable organizations, exempt institutions and government entities). Property a husband and wife own jointly is exempt from the tax, and so is property inherited from a spouse or from a child 21 or younger by a parent. The inheritance tax for farming families was eliminated in 2012. If the inheritance tax is paid within three months of the decedent's death, a 5% discount may apply.

Since Pennsylvania's estate tax is linked to the federal estate tax credit, which was not included in President Obama’s estate tax revisions in 2012, Pennsylvania's estate tax is effectively eliminated, according to the state tax department.

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