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These plans areexcluded from tax on your federal return, but not onyour state income tax return. Once you retire and beginto receive pension benefits, you will pay federal tax onyour retirement payments, but you will not pay PA taxon those benefits.
Thatâs because, if your âcombined incomeâ is in the applicable range, each additional dollar of income is not only taxed at your regular tax rate, it also causes an additional $0.50 or $0.85 of Social Security benefits to be taxable. Depending on how high your âcombined incomeâ is in a given year, your Social Security benefits could be nontaxable or partially taxable (with a maximum of 85% of them being included in your taxable income for the year).