In Pennsylvania, if the distribution code on Form 1099-R Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. shows as "7" for normal distribution, then the distribution amount will not transfer to the PA-40 form or be included in gross income on the state return. If the distribution code shows as a "1" or "2" for an early withdrawal, then the amount will transfer to the PA-40 and be included in gross income on the state return.

To enter this adjustment in the program:

1. From within your TaxAct return, click State to expand, then click Pennsylvania (or PA). On smaller devices, click  in the upper left-hand corner, then click State.
2. Click Income in the Pennsylvania Quick Q&A Topics menu to expand, then click Gross and miscellaneous compensation.
3. On the Pennsylvania - Gross Compensation screen, enter the appropriate figures in these fields:
   • Miscellaneous compensation
   • Other income and/or clergy adjustments
   • Less: qualified federal active-duty pay or other wage reductions
     
4. Scroll down, then click Continue.

Note. There are situations in which some or all retirement income should be taxed in PA. The code entered in Box 7 of Form 1099-R will determine the taxability on the PA return. You will want to verify whether the code in Box 7 of your paper 1099-R matches that which was entered into the program. If the code was a "1" or "2," this would indicate an early distribution.

Pennsylvania does tax early distributions in certain situations.

Additional Information

Per Pennsylvania Personal Income Tax Return PA-40 Instructions, on page 12:

Code 1 & 2 Early Distribution

This distribution is taxable for PA purposes, unless: (1) your pension or retirement plan was an eligible employer-sponsored retirement plan for PA tax 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 employer-sponsored retirement 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 to determine this amount. See Page 9 for additional information.

Note. If you are not sure whether your plan was an eligible retirement plan under PA tax law, ask your plan administrator.

On page 9:

Cost Recovery

PA law does not permit deductions or exemptions for contributions to retirement plans, investments in annuities, mutual funds, money market funds, and other personal contributions, even when deducted or exempt for federal purposes. Therefore, Pennsylvania will not tax your distributions or the payments you receive until you have recovered an amount equal to your contributions. Maintain your records of your contributions. If you receive an early taxable distribution from a retirement plan, and you do not have records of your contributions, consult your plan administrator.

Note that any link in the information above is updated each year automatically and will take you to the most recent version of the document at the time it is accessed.