Credits and breaks for Pennsylvania families: the new earned income credit, child care, 529s and Tax Forgiveness

A Pennsylvania family’s return starts at a disadvantage. The 3.07% applies to every dollar of wages, including 401(k) deferrals, with no standard deduction and nothing taken off for a spouse or a child. Three things pull it back. The Working Pennsylvanians Tax Credit, new since 2025, pays 10% of the family’s federal earned income credit, in cash if it exceeds the tax, with a 2025 maximum of $805 and a 2026 maximum to come. The Child and Dependent Care Enhancement Tax Credit pays 100% of the federal child-care credit as figured under the 2022 federal rules, up to $1,050 for one child and $2,100 for two or more, also refundable. And Tax Forgiveness on Schedule SP raises the income line below which no tax is owed by $9,500 for each dependent child, so a married couple with two children pays no Pennsylvania tax at all up to $32,000 of eligibility income and some reduced amount up to $34,250. Above those lines the useful tools are deductions that few federal preparers think to ask about: 529 contributions, student loan interest, and the unreimbursed work expenses Congress suspended in 2018 but Pennsylvania never did.

The two credits share a procedural trap. Both are computed from the federal return. The Department works out the Working Pennsylvanians credit from the federal Form 1040, which must be attached to a paper PA-40 or uploaded in myPATH, and the child-care credit requires federal Form 2441 and Schedule 3 attached to Schedule DC. A state return that goes in without its federal paperwork gets neither. Families who file the federal return with one product and the PA-40 with another, or who file the state return first, are the ones who lose.

No exemption, no child credit, no head of household

Pennsylvania has four filing statuses: single, married filing jointly, married filing separately, and final return for a decedent. There is no head-of-household status and no qualifying-widow status; an unmarried parent files as single. Because the rate is flat and there is no deduction or exemption, filing status changes the tax on the PA-40 not at all. Where it matters is Schedule SP, which has an unmarried table and a married table, and there the unmarried parent is not disadvantaged: the base line is lower ($6,500 against $13,000), but each dependent child adds the same $9,500, and a single parent of two reaches the 100% line at $25,500. Dependents for Schedule SP are the children claimed as dependents on the federal return, so divorced parents who alternate the federal exemption alternate the Pennsylvania forgiveness with it.

A child with more than $33 of Pennsylvania taxable income, interest on a custodial account say, files a PA-40 of their own. Pennsylvania has no kiddie tax and no election to put a child’s income on the parents’ return; the child’s return is short and usually qualifies for 100% Tax Forgiveness unless the parents’ income must be counted, which it must when the child is claimed as a dependent (verify).

The Working Pennsylvanians Tax Credit

Pennsylvania had no state earned income credit until the budget bill signed November 12, 2025 created one, first claimed on 2025 returns filed in 2026 and continuing for 2026. It is 10% of the federal earned income credit, refundable, with no separate eligibility test: anyone who qualifies for the federal credit qualifies for the state one, in the same proportion. For 2025 the federal maximum was $8,046 with three or more children, so the state maximum was $805; with two children $715, with one $433, with none $65. The 2026 state maximum will be 10% of the 2026 federal maximum once the IRS table is final, and is to come. The Department describes the 2025 credit as $193 million for 940,000 households, which works out to about $205 per family, because most families receive a federal credit well below the maximum.

There is no Pennsylvania schedule to fill out. Software prompts for the federal EITC amount, myPATH asks for it and for an upload of the 1040 if the federal return was filed elsewhere, and a paper PA-40 must have a copy of the 1040 clipped to it. The Department then calculates and pays the credit. It is not reduced by Tax Forgiveness and does not count toward eligibility income. Nonresidents and part-year residents may claim it in proportion to Pennsylvania income (verify). The federal credit itself, and who qualifies, is in The earned income credit.

The Child and Dependent Care Enhancement Tax Credit

Since 2022 Pennsylvania has paid a refundable credit equal to the federal child and dependent care credit, for care of a child under 13 or a disabled dependent that lets the parents work. The state credit is fixed to the federal credit as it stood in 2022: 35% of up to $3,000 of expenses for one qualifying person or $6,000 for two or more, sliding down to 20% as federal adjusted gross income passes $43,000. That gives a Pennsylvania maximum of $1,050 for one and $2,100 for two or more, and a floor of $600 and $1,200 once expenses reach $3,000 per person. The 2025 federal law raised the federal percentage to 50% for 2026 for lower-income families; the Department’s guidance says the Pennsylvania credit is “calculated based on the IRC percentages in effect for the 2022 tax year and do not adjust based on federal changes,” so the Pennsylvania credit for 2026 is what it was. A family whose federal credit rises to $3,000 for 2026 still gets $2,100 from Pennsylvania.

The credit is claimed on Schedule DC, carried to line 23 of the PA-40, with Form 2441 and Schedule 3 attached. It is refundable: a family with $900 of tax and a $2,100 credit receives $1,200 back. Because it keys to federal adjusted gross income for the percentage and to the federal definitions for what counts as care, the federal article applies: The child and dependent care credit. Pennsylvania adds nothing of its own and takes nothing away.

Tax Forgiveness: $9,500 per child

Schedule SP is the closest thing Pennsylvania has to a dependent exemption, and for families near the lines it is worth far more than one. The credit forgives 100% of the tax when eligibility income is at or below $13,000 for a married couple or $6,500 for an unmarried filer, plus $9,500 for each dependent child, and steps down by 10 percentage points for every $250 above that until it ends $2,250 later.

Eligibility income is Pennsylvania taxable income plus things the PA-40 does not tax: tax-exempt interest, gifts and inheritances, alimony received, nontaxable scholarships, the excluded gain on a home sale. It leaves out Social Security, retirement income, unemployment, child support and public assistance.

The steps are steep. A married couple with three children and $41,500 of wages owes $1,274 and gets all of it back; the same couple at $43,750 gets nothing. Each $250 of extra wages in that band costs about $135 of forgiveness, an effective rate near 54%, on top of the 3.07%. There is no planning around it except the obvious: a 401(k) deferral does not help, because Pennsylvania taxes it, but an HSA contribution or a 529 contribution does reduce taxable income and so reduces eligibility income (verify).

The 529 deduction

Pennsylvania’s largest family deduction is the one the federal return never asks about. Contributions to any state’s 529 plan, not only the PA 529 program, come off Pennsylvania income on Schedule O, up to the federal gift-tax annual exclusion per beneficiary per taxpayer: $19,000 for 2025, with the 2026 limit tracking the 2026 exclusion, expected to remain $19,000. The limit is per contributor and per child, so two parents funding two children’s accounts can deduct up to $76,000 in a year, provided each parent has at least that much income of their own; the deduction cannot exceed the contributor’s income and cannot be shifted to the other spouse. There is no carryforward. Grandparents who are Pennsylvania residents take the same deduction on their own return. A $5,000 contribution saves $154; the real value is that the account grows free of Pennsylvania tax, withdrawals for qualified expenses are not income, and PA 529 balances are exempt from the inheritance tax.

Qualified expenses follow IRC 529, which is why the two 529 changes in the 2025 federal law reach Pennsylvania automatically: the K-12 tuition limit rises to $20,000 a year for 2026, and postsecondary credentialing programs count as qualified expenses. The Department’s guidance confirms it will treat both as qualified. Pennsylvania has no K-12 tuition credit or deduction of its own, so a 529 account used for private school tuition is the one state break for it. PA ABLE contributions for a disabled family member get the same deduction, per contributor. The federal rules are in 529 plans and the other education breaks.

Student loan interest, and the other deductions

Beginning with 2025 returns, up to $2,500 of student loan interest per filer comes off Pennsylvania income on Schedule O, so a married couple each paying on their own loans can deduct $5,000. It follows the federal definition of qualified interest from Form 1098-E, without the federal income phase-out (verify). Pennsylvania still allows no deduction for tuition, no education credit, no educator expense deduction and no deduction for 401(k) or IRA contributions. It does allow unreimbursed employee business expenses on Schedule UE, union dues, required tools and uniforms, a home office the employer requires, and HSA contributions at the federal limits. Scholarships and fellowships are not Pennsylvania income, though they count toward Tax Forgiveness eligibility income. Child support received is not income; alimony received is not income and alimony paid is not deductible.

The local layer

None of the family credits reach the second return. The local earned income tax, commonly 1% of wages and net profits, is withheld by the employer by PSD code and reconciled on an annual return to the county collector by April 15, and Philadelphia’s Wage Tax (3.74% for residents, 3.735% from July 1, 2026) is withheld and settled with the city. Neither has a child credit, a care credit or forgiveness; a family that owes nothing to the state after Schedule SP still owes the full local tax. The one local break is the Local Services Tax exemption below $12,000 of earned income where the tax exceeds $10, claimed with the employer.