Overview of Pennsylvania Retirement Tax Friendliness
Pennsylvania fully exempts all income from Social Security, as well as payments from retirement accounts, like 401(k)s and IRAs. It also exempts pension income for seniors age 60 or older. While its property tax rates are higher than average, the average total sales tax rate is among the 20 lowest in the country.
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- Our Tax Expert
Jennifer Mansfield, CPA Tax
Jennifer Mansfield, CPA, JD/LLM-Tax, is a Certified Public Accountant with more than 30 years of experience providing tax advice. SmartAsset’s tax expert has a degree in Accounting and Business/Management from the University of Wyoming, as well as both a Masters in Tax Laws and a Juris Doctorate from Georgetown University Law Center. Jennifer has mostly worked in public accounting firms, including Ernst & Young and Deloitte. She is passionate about helping provide people and businesses with valuable accounting and tax advice to allow them to prosper financially. Jennifer lives in Arizona and was recently named to the Greater Tucson Leadership Program.
Pennsylvania Retirement Taxes
While the Northeast is generally considered a poor region for retirement because of its high cost of living and expensive taxes, Pennsylvania may be an exception. While living expenses in the Philadelphia area are above average, the rest of the state has a fairly low cost of living.
Retirement taxes in Pennsylvania are also low. The state fully exempts all income from Social Security and retirement accounts. It also exempts pension income for seniors 60 and older. While property tax rates are fairly high here, the average total sales tax rate is just 6.34%, the 17th-lowest mark in the U.S.
A financial advisor in Pennsylvania can help you plan for retirement and other financial goals. Financial advisors can also help with investing and financial plans, including taxes, homeownership, insurance and estate planning, to make sure you are preparing for the future.
Is Pennsylvania tax-friendly for retirees?
Pennsylvania exempts all forms of retirement income from taxation for residents 60 and older. That can mean thousands of dollars in annual savings as compared with other states in the region. It also has relatively low sales taxes.
Some ways in which Pennsylvania is not quite so retirement tax-friendly: It has an inheritance tax, and property taxes are higher than average.
Is Social Security taxable in Pennsylvania?
There are no taxes on Social Security retirement benefits in Pennsylvania. Retirees with income from other sources may still be required to pay federal income taxes on Social Security, however.
Are other forms of retirement income taxable in Pennsylvania?
For most retirees and all seniors, income from retirement accounts, which includes 401(k)s and IRAs, is fully exempt. Income from pensions is also exempt for anyone who is more than 59.5 years old.
So if you are 65 and receive $15,000 annually in Social Security retirement benefits, $10,000 in pension income and another $20,000 from your IRA, you will not have to pay state taxes on your income in Pennsylvania. Keep in mind, however, that you may have to pay federal taxes.
How high are property taxes in Pennsylvania?
The average effective property tax rate in Pennsylvania is 1.50%, which ranks as the 12th-highest in the U.S. Some of the highest rates in the state are found in the Pittsburgh area. Allegheny County has an average effective property tax rate of 2.01%. However, there are property tax relief programs that will help lower the bill for seniors throughout the state.
What is the Pennsylvania Property Tax/Rent Rebate Program?
Senior citizens in Pennsylvania may qualify for a rebate on their property taxes or rent if they meet certain requirements. First and foremost, they must be at least 65 years old. The program is also available to widows and widowers 50 and older and people 18 and older with disabilities.
These Pennsylvania residents must also have income no greater than $35,000 if they own their home. For renters, the income limit is $15,000. That income includes 50% of Social Security retirement benefits, along with income from any other source.
Seniors who meet these criteria will receive a rebate of between $250 and $650 to help offset property taxes. The size of the rebate depends on income. If you earn $8,000 or less per year, you receive the full rebate. If you earn more than $18,000, you receive a $250 rebate. Between those levels, the rebate is $500 (income of $8,001 to $15,000) and $300 (income of $15,001 to $18,000).
Another property tax relief program that benefits all Pennsylvania homeowners is the state property tax reduction allocation. This is a state-funded homestead exclusion that reduces taxable values across the states. The amounts vary by county.
How high are sales taxes in Pennsylvania?
The statewide sales tax rate is 6%, which is relatively high. Only two local governments have their own sales taxes in Pennsylvania. Philadelphia County has an additional 2% rate and Allegheny County (which contains Pittsburgh) has an additional 1% rate. Elsewhere in the state, the rate is 6%.
Additionally, retirees in Pennsylvania benefit from a number of exemptions on common products. Clothing, groceries, prescription drugs and residential fuels are all exempt from the Pennsylvania sales tax.
What other Pennsylvania taxes should I be concerned about?
Pennsylvania retirees who are planning their estate should be aware of the state’s inheritance tax. This tax affects the recipients of any inheritance, who must pay a portion of the value of the property they receive in taxes.
The inheritance tax rate varies depending on the relationship of the inheritor to the decedent. The tax is 4.5% for direct descendants, such as children and grandchildren, 12% for siblings and 15% for anyone else. Surviving spouses and parents inheriting from a child who was 21 or younger are not taxed.