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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.
Taxable income from retired pay does not include the amount of SBP deductions. Participants are taxed only on what they actually receive. For example, if a retiree's non-disability retired pay is $6,000 a year and is reduced by $700 for SBP, only the reduced retired pay of $5,300 need be included as taxable income on the Federal income tax return. The SBP payable to the designated beneficiary is subject to Federal income tax, but is not subject to Federal estate tax.