The Pros and Cons of Retiring in Pennsylvania | Rodgers & Associates

The Pros and Cons of Retiring in Pennsylvania

Pennsyl­vania ranked in the middle (26 out of 50) in the Tax Foundation’s 2018 State Tax Climate index. With an average tax burden of 10.2%, Pennsyl­vania was the 10th highest in the nation. Then why would Kiplinger rank Pennsyl­vania #6 in the 2017 ranking of the 10 most tax-friendly states for retirees?

There are only two states that exempt nearly all retirement income – Pennsyl­vania and Missis­sippi. Military pensions, other public and private pensions, social security benefits, distri­b­u­tions from IRAs, and other employer plans are all exempt from income tax. This is a big advantage for a retiree!  When it comes to taxable income such as wages and investment income, Pennsyl­vania has one of the lowest income tax rates – a flat rate 3.07%. Some munic­i­pal­ities have their own additional income tax ranging from 1% to a high of 3.928% in Philadelphia. The state sales tax is 6%, but food, clothing, and medicine are exempt.

Unfor­tu­nately, Pennsyl­vania is one of only seven states with an inher­i­tance tax. An inher­i­tance tax is calcu­lated based on who receives a deceased person’s property and, in some states, how much they receive.

PA Inheritance Tax Rates

  • 0% on transfers to a surviving spouse or to a parent from a child aged 21 or younger.
  • 4.5% on transfers to direct descen­dants and lineal heirs.
  • 12% on transfers to siblings.
  • 15% on transfers to other heirs, except chari­table organi­za­tions and exempt institutions/government entities.

Pennsylvania’s inher­i­tance tax applies to all real estate and to all tangible personal property (such as furniture, vehicles, jewelry, etc.) located in the state, whether the property is owned by a resident or non-resident. It also applies to all intan­gible property of Pennsyl­vania residents (bank accounts, stocks, bonds, mutual funds, and patents, etc.).

Pennsyl­vania is a great place to retire but can be an expensive place to have an estate. Careful planning is required to take advantage of the low state income tax rates while minimizing the inher­i­tance cost to heirs.