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Pennsylvania Retirement Tax Friendliness

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Overview of Pennsylvania Retirement Tax Friendliness

Pennsylvania fully exempts all income from Social Security or from retirement accounts like a 401(k) or an IRA. It also exempts pension income for seniors age 60 or older. While its property tax rates are somewhat higher than average, the average total sales tax rate is among the 20 lowest in the country.

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is toward retirees.
Social Security income is taxed.
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    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.

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Pennsylvania Retirement Taxes

Photo credit: ©iStock.com/nicoolay

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 or from retirement accounts like a 401(k) or an IRA. It also exempts pension income for seniors (60 or older). While its property tax rates are somewhat higher than average, the average total sales tax rate is 6.34%, among the 20 lowest in the U.S. Want to know all about Pennsylvania’s retirement taxes? We’ve got you covered. Read on.

Is Pennsylvania tax-friendly for retirees?

Yes. It 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 tax.

Some ways in which Pennsylvania is not quite so retirement tax-friendly: it has an inheritance tax (described in further detail below) and property taxes are higher than average.

Is Social Security taxable in Pennsylvania?

No. 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?

Not for most retirees (and all seniors). Income from retirement accounts, which includes a 401(k) or an IRA, is fully exempt. Income from pensions is 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?

Fairly high. The average effective property tax rate is 1.55%, which ranks as the 13th 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 2.08%. However, there are property tax relief programs that will help lower the bill for seniors throughout the state, as described below.

What is the Pennsylvania senior citizen 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 those criteria will receive a rebate of between $650 and $250 to offset property taxes. The amount 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. In 2017 the exclusion saved homeowners in some counties more than $600.

Photo credit: ©iStock.com/Songquan Deng

How high are sales taxes in Pennsylvania?

Relatively low. The statewide rate is 6%. 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.

Most Tax Friendly Places for Retirees

SmartAsset’s interactive map highlights the places in the country with tax policies that are most favorable to retirees. Zoom between states and the national map to see the most tax-friendly places in each area of the country.

Rank City Income Tax Paid Property Tax Rate Sales Tax Paid Fuel Tax Paid Social Security Taxed?

Methodology To find the most tax friendly places for retirees, our study analyzed how the tax policies of each city would impact a theoretical retiree with an annual income of $50,000. Our analysis assumes a retiree receiving $15,000 from Social Security benefits, $10,000 from a private pension, $10,000 in wages and $15,000 from a retirement savings account like a 401(k) or IRA.

To calculate the expected income tax this person would pay in each location, we applied the relevant deductions and exemptions. This included the standard deduction, personal exemption and deductions for each specific type of retirement income. We then calculated how much this person would pay in income tax at federal, state, county and local levels.

We calculated the effective property tax rate by dividing median property tax paid by median home value for each city.

In order to determine sales tax burden we estimated that 35% of take-home (after-tax) pay is spent on taxable goods. We multiplied the average sales tax rate for a city by the household income after subtracting income tax. This product is then multiplied by 35% to estimate the sales tax paid.

For fuel taxes, we first distributed statewide vehicle miles traveled to the city level using the number of vehicles in each county. We then calculated miles driven per capita in each city. Using the nationwide average fuel economy, we calculated the average gallons of gas used per capita in each city and multiplied that by the fuel tax.

For each city we determined whether or not Social Security income was taxable.

Finally, we created an overall index weighted to best capture the taxes that most affect retirees. The income tax category made up 40% of the index, property taxes accounted for 30%, sales taxes 20% and fuel taxes 10%.

Sources: Internal Revenue Service, Social Security Administration, state websites, local government websites, US Census Bureau 2018 American Community Survey, Avalara, American Petroleum Institute, GasBuddy, UMTRI, Federal Highway Administration