Does Pennsylvania Tax Military Retirement Pay?

Pennsylvania does not tax military retirement pay. The state’s Tax Reform Code leaves retired and retainer pay out of its definition of taxable compensation, so the flat 3.07 percent personal income tax does not apply, no matter your age, rank, branch, or years of service.¹

What the Exemption Covers

The Department of Revenue’s guidance confirms that retired or retainer pay of a member or former member of a uniformed service, calculated under Chapter 71 of Title 10 of the U.S. Code, is exempt from Pennsylvania personal income tax.¹ Every branch counts, and so do the National Guard and the reserves.²

You do not apply for the exemption or file a separate form. If the payments come from a qualified military retirement plan, the Department of Revenue treats them as non-taxable. That holds whether you retired after 20 years of active duty, were medically retired, or started drawing reserve retired pay at age 60.

Pennsylvania’s version of this benefit is unusually broad. There is no income cap, no phase-out, and no age threshold. A 40-year-old medically retired E-6 and a 70-year-old retired O-6 get the same full exclusion.

Related Military Payments Pennsylvania Also Exempts

Several payments tied to your service are treated the same way for Pennsylvania purposes.

Survivor Benefit Plan annuities, Reserve Component SBP, and Retired Serviceman’s Family Protection Plan payments are all exempt from Pennsylvania income tax.² Surviving spouses and dependents do not report these annuities as taxable income on the PA-40, and no separate exemption application is required. VA Dependency and Indemnity Compensation is tax-free at both the federal and state level.

VA disability compensation and disability retirement pay for service-connected injuries or illness are excluded from Pennsylvania income tax, whether the disability originated in combat or non-combat service.²

Two pay types that often cause confusion deserve a closer look. Combat-Related Special Compensation is non-taxable at the federal level and therefore non-taxable in Pennsylvania. Concurrent Retirement and Disability Pay restores a portion of retired pay previously waived to receive VA disability, so it carries the same tax treatment as the underlying retired pay.³ Because Pennsylvania exempts military retired pay, CRDP is also exempt at the state level, even though it remains federally taxable.

Combat zone pay is covered too. Differential pay received while on active duty in a combat zone is not subject to Pennsylvania personal income tax, and combat zone pay is excluded from eligibility income when calculating the state’s Tax Forgiveness credit.⁴

Federal Tax Still Applies

Pennsylvania’s exemption does not make your pension tax-free overall. Military retirement pay based on age or length of service is fully taxable as federal income.⁵ DFAS withholds federal income tax from your retired pay each month, and you report the full amount on your federal Form 1040, lines 5a and 5b.⁶

You can adjust federal withholding through the DFAS myPay portal or by sending DFAS a new IRS Form W-4. The IRS also offers an online Tax Withholding Estimator for checking whether your current withholding matches your actual liability. One useful detail: military retirement pay is not earned income for Social Security purposes, so no FICA taxes come out.⁵

Service members on duty in a designated combat zone get automatic federal deadline relief. Filing and payment deadlines are extended for the entire period of combat zone service plus 180 days after departure, with no interest or penalties during that window.⁷

How to File the PA-40 Correctly

DFAS issues a Form 1099-R each year to military retirees and SBP annuitants. The fastest way to get it is through myPay, where it usually posts in late December for the prior tax year; paper copies go out in mid-to-late January.⁸ Check Box 7 for the distribution code. Military pensions should show Code 7 (normal distribution). Survivor annuities paid to a beneficiary after the retiree’s death should show Code 4.⁹ If the code looks wrong, contact DFAS before filing.

On the PA-40 itself, do not enter your military retirement pay on Line 1a. That line is for taxable compensation, and the form instructions tell you to exclude exempt income such as combat zone pay and qualifying retirement benefits.¹⁰

If you file through myPATH, watch the data-entry step closely. The system can pull information from your federal return, and you need to verify that your military retirement pay is not carrying over into the taxable compensation field. Letting auto-populated data inflate state taxable income is the most common filing mistake military retirees make in Pennsylvania.

Pennsylvania’s Schedule W-2S reports compensation and distributions from retirement plans. You can list military retirement distributions in Part B of the W-2S while making sure the non-taxable amount does not flow to Line 1a. File by the standard April 15 deadline. Even with no tax owed on your pension, you may still need to file a return if you had other taxable income during the year, such as civilian wages, interest, or investment gains taxed at the 3.07 percent rate.¹¹ Keep the 1099-R with your tax records as proof the income qualifies for the exclusion.

Residency and Military Spouses

Pennsylvania’s income tax applies to domiciliaries and statutory residents. You are a domiciliary if you keep a permanent home in the state and intend to return to it whenever you are away. A statutory resident maintains a permanent place of abode in Pennsylvania and spends more than 181 days in the state during the tax year.¹²

For retirees, the result is simple. If Pennsylvania is your home, file a PA-40 and leave your military retirement pay off it. If you moved to Pennsylvania after retiring and established domicile here, the exemption applies right away. Active-duty pay earned while stationed outside Pennsylvania is also excluded from state tax, which matters if you are still serving while drawing retirement from a prior period of service.⁴

Military spouses have a separate route under the Military Spouses Residency Relief Act. Three conditions must all be true: the service member is in Pennsylvania under military orders, you are in the state solely to be with your spouse, and you share the same legal domicile as your spouse in another state.⁴ When all three are met, you can source your non-military compensation to your home state rather than Pennsylvania. That is particularly valuable if your domicile state has no income tax. You must actually maintain domicile elsewhere; a preference to be taxed in another state is not enough.

1
Commonwealth of Pennsylvania. Gross Compensation – Department of Revenue
2
The Official Army Benefits Website. Pennsylvania Military and Veteran Benefits
3
Defense Finance and Accounting Service. Is it Taxable?
4
Commonwealth of Pennsylvania. Military Pay for PA Personal Income Tax Purposes
5
The Official Army Benefits Website. Federal Taxes on Veterans Disability or Military Retirement Pensions
6
IRS.gov. Instructions for Form 1040 (2025)
7
Internal Revenue Service. Extension of Deadlines — Combat Zone Service
8
Defense Finance and Accounting Service. Getting Your 1099-R
9
Internal Revenue Service. Instructions for Forms 1099-R and 5498 (2025)
10
Pennsylvania Department of Revenue. 2025 Pennsylvania Income Tax Return (PA-40)
11
Commonwealth of Pennsylvania. Tax Rates – Department of Revenue
12
Commonwealth of Pennsylvania. Determining Residency for PA Personal Income Tax Purposes