Updated October 21, 2026. Quick answer: Pennsylvania has no separate retirement subtraction line. Instead the PA-40 instructions list retirement income that is not taxable, and line 1a of the return tells you not to include qualifying retirement benefits in gross compensation. Whether a payment qualifies depends on the plan and on whether you had retired when it was paid.
What this form does
The PA-40 instructions carry a list headed “INCOME NOT TAXABLE FOR PA PIT PURPOSES:” that names the retirement items below, and the return itself reflects the same idea on line 1a. Pennsylvania retirement taxes covers how Pennsylvania treats retirement income at the state level.
The instructions’ retirement section begins “Retirement, Pensions, and Deferred Compensation” and covers employer-sponsored plans, contributions and distributions, which the table below follows.
Who it applies to
The qualification depends on the plan type and on retirement itself. The instructions say “All amounts you receive from your eligible employer-sponsored retirement or old age benefit plan are taxable in the year you receive the payments, except:” and then list exceptions, the first being “Payments you receive after you qualify for retirement and retire.”
They also tell you how to find out whether your plan counts: “Ask your employer or plan administrator if your employer’s retirement plan is an eligible plan for PA income tax purposes.”
A distribution can still be taxable: “you may have PA-taxable compensation if:” the plan “is not an eligible employer-sponsored retirement plan” or you “have not reached the retirement age or years of service requirements”.
The lines, one by one
| Line or passage | What the form and instructions say |
|---|---|
| PA-40, line 1a | “Gross Compensation. Do not include exempt income, such as combat zone pay and qualifying retirement benefits. See the instructions.” |
| Not taxable list, first item | “Social Security benefits and/or Railroad Retirement benefits” |
| Not taxable list, retirement benefits | “Commonly recognized pension, old age, or retirement benefits paid after becoming eligible to retire, and retiring” |
| Not taxable list, other items | “United Mine Workers Pension”, “Military pension benefits” and “Civil Service Annuity” |
| Eligible employer-sponsored plans | “Pennsylvania does not impose income tax on payments you receive that are commonly recognized retirement benefits distributed from eligible employer-sponsored retirement plans.” |
| Eligible plans, examples | “Ask your employer or plan administrator if your employer’s retirement plan is an eligible plan for PA income tax purposes.” |
| Contributions | “The contributions you make to your employer’s sponsored retirement plan are PA-taxable compensation” |
| Distributions, rule | “All amounts you receive from your eligible employer-sponsored retirement or old age benefit plan are taxable in the year you receive the payments, except:” |
| Distributions, exception 1 | “Payments you receive after you qualify for retirement and retire.” |
| Distributions, exception 5 | “All distributions (regardless of the distribution code reported in Box 7 of the 1099-R) from the State Employees’ Retirement System, the Pennsylvania School Employees’ Retirement System, the Pennsylvania Municipal Employees’ Retirement System, and the U.S. Civil Service Commission Retirement Disability Plan.” |
| Distributions, exception 6 | “Retired or retainer pay of a member or former member of a uniform service computed under Chapter 71 of Title 10, U.S. Code as amended.” |
| Early retirement incentive | “Payments you receive as an inducement to retire early are taxable compensation.” |
| Form 1099-R, code 7 | “This distribution from an eligible employer-sponsored retirement plan is not taxable if you met the plan requirements (the age and/or years of service required by the plan) for retirement, and retired after meeting those requirements.” |
The payer reports these amounts on Form 1099-R; see 1099-R boxes explained, Form 1040 line 5a and 5b and Form 1040 line 4a and 4b for the federal side. For IRAs and 401(k) rollovers, see Pennsylvania 401(k) and IRA withdrawals and whether Pennsylvania taxes pensions.
Where the result goes next
Retirement benefits that qualify stay out of gross compensation on line 1a: “Do not include exempt income, such as combat zone pay and qualifying retirement benefits.” The next line of the return then reads “Net Compensation. Subtract Line 1b from Line 1a.”
For Form 1099-R code 1 and 2 distributions the instructions send you to the cost recovery method: “You must use the cost recovery method to determine this amount.” Check the page the instructions point to on your own copy.
Edition and line numbers
This page reads the 2025 PA-40 Personal Income Tax Return Instructions and the 2025 Form PA-40 for tax year 2025, the current file the Pennsylvania Department of Revenue served on 2026-10-21. Check the edition printed on your own form and use that edition’s line numbers.
Common mistakes
- Assuming every plan is exempt. The instructions say “Ask your employer or plan administrator if your employer’s retirement plan is an eligible plan for PA income tax purposes.”
- Treating contributions as exempt. The instructions say “The contributions you make to your employer’s sponsored retirement plan are PA-taxable compensation”
- Treating an early retirement incentive as retirement income. The instructions say “Payments you receive as an inducement to retire early are taxable compensation.”
Related: Pennsylvania retirement taxes, whether Pennsylvania taxes pensions, Pennsylvania 401(k) and IRA withdrawals, Form 1040 line 5a and 5b, and 1099-R boxes explained.
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Answer againSources
- 2025 PA-40 Personal Income Tax Return Instructions, Pennsylvania Department of Revenue: www.pa.gov
- 2025 Form PA-40, Pennsylvania Department of Revenue: www.pa.gov
Read from the state revenue documents linked above on October 21, 2026. General information, not tax advice. Your own facts decide the outcome, and a preparer or the state revenue department is the right place to confirm anything consequential.