You’ll need to go through the questions of your state and review to see if you perhaps chose the wrong answer to one of the state retirement income questions. You must tell the program what kind of retirement distribution you received or the program will consider it taxable.
In the PA interview, go to the income and adjustments section and start the interview. After it asks questions about W2 (if you have any) it will ask about pensions. It will ask “What kind of pension income did you have from PA? Click on the state type code and select the proper type of pension.
Select the 'State Type Code' as "I'm eligible, plan's eligible (no PA tax)" if no other code applies. (See the attached screenshot below. Click to enlarge.)
In order to get there quickly, simply click on State Taxes across the top and click Continue to review them (don't click Done With State until after you reviewed and corrected anything that needed to be changed).
More info, if you're interested:
Not all 1099R distributions are exempt from PA income tax. You have the opportunity, in the PA interview, to review each 1099R and designate what kind of retirement distribution it is.
The income reported on a 1099R is considered taxable unless you tell the program otherwise.
Generally, if box 7 of your 1099R is coded 7 or 4, it is not taxable for PA income tax purposes. If it is coded 1 or 2, it may be taxable to the extent that the distributions exceed your basis in your retirement plan. If coded 1D or 7D, it is a commercial annuity and is taxable same as federal. Code 3 or 4 Death/disability is a distribution due to death and/or disability. A distribution due to death is not taxable for PA purposes - unless included with Code D (see Annuities below). A distribution due to disability generally is not taxable for PA purposes (See Annuities below).
Your basis in a retirement plan is the money that you contributed to the plan less any distributions taken in previous years. The basis does NOT include earnings inside the plan or your employer contributions.
If you rolled over the distribution into another retirement plan or converted it into a Roth IRA, it is also not taxable.
