Pennsylvania Military Retired Pay and Military Pay Tax Treatment

Pennsylvania's personal income tax works differently from most states. It taxes eight specific classes of income at a flat rate and does not use federal adjusted gross income as its starting point. Retirement income is simply not one of the taxed classes. The result is that military retired pay is not taxable in Pennsylvania. There is no cap, no age test, and no subtraction to claim, because the income never enters the base. Survivor Benefit Plan, Reserve Component SBP, and Retired Serviceman's Family Protection Plan annuities are likewise not taxed. For a service member still serving, the rule that matters is geographic. Active duty pay earned by a Pennsylvania resident on federal active duty outside the Commonwealth is not taxable compensation for Pennsylvania purposes. Active duty pay earned inside Pennsylvania is taxable. That exclusion has to be claimed correctly rather than assumed. A resident whose W-2 includes pay for active duty outside Pennsylvania should leave that amount off Line 1a of the PA-40 and submit the W-2 together with the military orders and an explanation of the amount excluded. The Department accepts the authority section of orders directing the resident to federal active duty outside Pennsylvania as proof. Combat zone and hazardous duty pay receives the same filing extension Pennsylvania grants under federal law, 180 days from the last day of service or of continuous hospitalization. VA disability compensation, VA pension, home and vehicle grants, and Dependency and Indemnity Compensation are not taxable. National Guard pay for state active duty ordered in an emergency is not taxed. Differential pay to a reserve component member is taxable except while on active duty in a combat zone or hazardous duty area. Pennsylvania also does not tax Social Security benefits. Local earned income taxes are levied separately by municipalities and school districts and follow their own rules, so a retiree should confirm the local treatment as well as the state one.