To determine if the amount you received is taxable in Pennsylvania, review boxes 1 through 3 (the amount you received or your distributions) and the PA PIT treatment of box 7 (the codes that will help determine the taxability of your distribution). The Federal Codes contained in box 7 of Form 1099R include:
Code 1 & 2 Early distribution. This distribution is taxable for PA purposes, unless: (1) your pension or retirement plan was an eligible plan for PA PIT purposes, and (2) you retired after meeting the age conditions of the plan or years of service conditions of the plan. If your plan was not an eligible plan, or if you have not attained the age or years of service required under the plan to retire, you must determine the PA taxable amount of your distribution. You must use the cost recovery method. This means that you previously paid PA income tax on your contributions to the plan. Therefore, Pennsylvania will not tax your distributions until you have received (recovered) an amount equal to your previously taxed contributions. Consult your plan administrator as to your previously taxed contributions to the eligible Pennsylvania retirement plan.
IMPORTANT: If you are not sure whether your plan was an eligible retirement plan under PA PIT law, you must ask your plan administrator.
Code 3 or 4 Death/disability distribution. This is a distribution due to death and/or disability. A distribution due to death is not taxable for PA purposes. A distribution due to disability generally is not taxable for PA purposes.
Code 7 Normal Distribution. This distribution from an eligible Pennsylvania 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.
Code G or H Rollover. This is a rollover from one qualified fund to another and is not taxable for PA purposes. See IRA Distributions below.
Distributions listed in boxes 8 or 9b are distributions from an insurance policy or annuity purchased for your retirement. Such distributions are not taxable if:
1. Your insurance policy or annuity was from an eligible plan for PA PIT purposes; and
2. You retired after meeting the age or years of service conditions of such eligible plan.
If you do not meet these requirements, the taxation of your distributions is determined using one of two methods (see below). The distributions are taxable as interest income on PA Schedule A, line 2, of the PA 40, not compensation on line 1A.
IRA Distributions (60 day rollover rule)
If you received a distribution from an IRA and rolled the entire distribution (100 percent) into a Roth IRA directly, or within 60 days, the distribution is not taxable income for PA purposes. If under age 59 1/2 and you did not roll the entire distribution into another IRA, you must report PA taxable income to the extent the distribution exceeds your previously taxed contributions.
Distributions from an IRA, including a federal Roth IRA, are taxable to the extent the distribution exceeds your previously taxed contributions. Distributions you receive after retiring but before age 59½ are taxable even if you receive substantially equal payments, and you do not pay the federal penalty for an early withdrawal. Distributions you receive after age 59½ are not taxable even if not retired.
PA law does not have any exceptions similar to the federal exceptions for withdrawal before age 59½
If you invested in a retirement annuity that is not part of an employer-sponsored program or a commonly recognized retirement program, you have PA taxable income when you begin receiving annuity payments. For tax years beginning on or after January 1, 2005, any amounts reported in gross income for Federal Income Tax purposes for a retirement annuity that is not an employer sponsored retirement annuity (reported as code 7D in Box 7 beginning with 2013 Forms 1099-R) are reported as interest income on PA Schedule A regardless of whether the annuity payments began before January 1, 2005, or on or after January 1, 2005. For tax years prior to January 1, 2005, use the cost recovery method for determining the amount of any payments to report as gain or loss on the sale, exchange or disposition of property on PA Schedule D.
Note: As a result of the above differences in tax treatments for tax years before January 1, 2005, and those beginning on or after January 1, 2005, taxpayers who exchange an annuity contract where the annuity contract began making payments prior to January 1, 2005, will have a different state basis in the annuity as a result of the use of the cost recovery method for PA Personal Income Tax purposes prior to January 1, 2005.
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