How Pennsylvania income tax works: eight classes of income, no deductions, 3.07%

Every other income-tax state starts from federal adjusted gross income or federal taxable income and adjusts from there. Pennsylvania does not. Form PA-40 lists eight classes of income, compensation, interest, dividends, business profit, gains on property, rents and royalties, estate and trust income, and gambling winnings, each figured under the Pennsylvania Tax Reform Code, each netted on its own. The total is taxed at 3.07%, the same rate since 2004, for every filing status, from the first dollar. There is no standard deduction, no itemizing, no personal or dependent exemption, no brackets. A loss in one class never offsets income in another, is never shared between spouses on a joint return, and never carries to another year. In place of deductions and exemptions Pennsylvania offers Tax Forgiveness, a credit that wipes out the tax for households below a fixed income line, and a short list of credits. The structure explains almost everything else about the return, including why the new federal deductions for tips, overtime, seniors and car-loan interest changed nothing here: there is no federal number on the PA-40 for them to flow through.

The flat rate makes Pennsylvania look like a low-tax state, and for many retirees it is, because pensions, IRA withdrawals after 59½ and Social Security are not in any class of income. For a working household the picture is different. The 3.07% applies to 401(k) deferrals, so Box 16 of the W-2 is usually higher than Box 1, and it applies to the first dollar. Nearly every municipality and school district adds its own earned income tax, commonly 1%, on a separate return; Philadelphia’s Wage Tax is 3.74% for residents until July 1, 2026 and 3.735% after. A family earning $90,000 in a typical township pays about 4.07% of wages in state and local income tax; in Philadelphia, nearly 6.8%.

Who files

Anyone with more than $33 of Pennsylvania gross taxable income files a PA-40, whether or not tax is due, and so does anyone who had a loss from a business, a partnership or a Pennsylvania S corporation. Full-year residents report everything, wherever earned, and claim a credit on Schedule G-L for income tax paid to another state. Part-year residents and nonresidents report Pennsylvania-source income, which never includes interest, dividends or gains on stocks and bonds for the nonresident period. Residents of Indiana, Maryland, New Jersey, Ohio, Virginia and West Virginia who earn wages here pay only their home state on those wages under the reciprocal agreements. Married couples may file jointly or separately regardless of how they filed federally, and because losses cannot be shared between spouses a joint return is often no better than two separate ones. There is no head-of-household status; an unmarried parent files as single and uses the unmarried table for Tax Forgiveness, which gives the same $9,500 per dependent child either way. Residency and the move-year return are in Moving to Pennsylvania.

Where it starts: eight classes, not a federal line

Lines 1 through 8 of the PA-40 are the eight classes. Each is computed on its own schedule or taken from its own form, under Pennsylvania definitions that only sometimes match the federal ones.

Line 9 is the total of the eight classes, counting a class with a net loss as zero. That rule, not the rate, is what makes Pennsylvania expensive for people with uneven income.

The no-netting rule. A stock loss of $10,000 on Schedule D in a year with no gains is simply gone. It does not reduce wages, it does not carry forward, and if the spouse had a $10,000 gain the same year on a joint return, the spouse’s gain is taxed in full. A landlord whose rentals lose $8,000 on Schedule E owes 3.07% on every dollar of salary anyway. The federal return nets all of this into one adjusted gross income; Pennsylvania never does. The one exception is within a class: several businesses on Schedule C net against each other, several rentals net on Schedule E, and gambling losses offset gambling winnings.

What is not in any class. Social Security, railroad retirement, unemployment compensation, workers’ compensation, pensions and retirement-plan distributions received after retirement, IRA distributions after 59½, qualified Roth withdrawals, child support, public assistance, life insurance proceeds, inheritances, forgiven personal debt, forgiven student loans, and the gain on a principal residence that meets the two-of-five-year tests, with no dollar cap. None of these appear on the PA-40. They are not subtracted; they were never added.

The deductions, all five of them

Line 1b and line 10 are the only places anything comes off Pennsylvania income. There is no standard deduction and no itemizing, so mortgage interest, charitable gifts, medical bills, property tax and state tax never appear. The $40,400 federal SALT cap is irrelevant; the Department of Revenue’s own guidance on the 2025 federal law says simply that Pennsylvania “does not allow for itemized deductions.”

Not deductible: 401(k) and traditional IRA contributions, alimony paid, moving expenses, educator expenses, half of self-employment tax, QBI, bonus depreciation, personal interest, the federal senior deduction, tips or overtime.

Schedule UE is the deduction federal preparers forget. Congress suspended unreimbursed employee expenses in 2018; Pennsylvania never did. A union electrician with $900 of dues, $600 of required tools and $400 of work boots reduces state wages by $1,900 and saves $58. The expenses must be ordinary, necessary, actually paid and required by the employer, and the Department asks for documentation on this line more than any other. The 529 deduction is the largest most families can take: per beneficiary, per taxpayer, any state’s plan, and it cannot exceed the contributor’s own income or move between spouses.

The rate

Line 9 less line 10 is adjusted Pennsylvania taxable income, line 11. Times 3.07% is the tax, line 12. That is the whole calculation. Wages, interest, dividends, short-term gains, long-term gains, lottery winnings and business profit all pay the same rate; there is no preferred rate for capital gains and no 0% bracket. The rate has been 3.07% since 2004 and the state constitution’s uniformity clause requires a single rate for everyone, which is why Pennsylvania has never had brackets and why the Tax Forgiveness credit is written as a credit rather than a graduated exemption.

Tax Forgiveness: the credit that stands in for an exemption

With no exemption, a family of four earning $20,000 would owe $614 on the arithmetic above. Schedule SP undoes that. Tax Forgiveness refunds 100% of the tax when “eligibility income” is at or below $6,500 for a single filer or $13,000 for a married couple, plus $9,500 for each dependent child, and steps the credit down by 10 percentage points for each $250 above that line until it reaches zero $2,250 later. The table has not changed in years and is not indexed.

Between the two columns the credit falls 10 points per $250: a single parent of two with $26,000 of eligibility income is $500 over the 100% line and gets 80%.

Eligibility income is wider than taxable income. It starts with line 9 and adds back things the PA-40 never taxed: tax-exempt interest, gifts, inheritances, insurance proceeds, alimony received, nontaxable military pay other than combat pay, the excluded gain on a home sale, scholarships, and for part-year residents the income earned elsewhere. It does not add back Social Security, retirement income, unemployment, child support or public assistance. That last list is why a retired couple living on a pension and Social Security, with $12,000 of interest and dividends, owes $368 before forgiveness and nothing after it. The retiree side is in Pennsylvania for retirees.

The credits

Pennsylvania has fewer credits than most states, and two of the four that matter to households are new since 2022.

There is no Pennsylvania child tax credit, no renter or property-tax credit, no senior credit and no education credit on the PA-40. Property-tax relief is the separate Property Tax/Rent Rebate application, covered in the retirees article.

The Working Pennsylvanians Tax Credit is Pennsylvania’s first state earned income credit, created in the budget bill signed November 12, 2025 and first claimed on 2025 returns. The trap is procedural: the Department works the credit out from a copy of the federal 1040, and a PA-40 filed without it gets no credit. The family credits are covered in Credits and breaks for Pennsylvania families.

Withholding and estimated payments

Pennsylvania has no employee withholding certificate. There is nothing to fill out, no allowances to claim; the employer withholds 3.07% of every dollar of taxable compensation, including 401(k) deferrals, and for a wage earner with no other income the result is exact to the dollar. Form REV-419 exists only to stop withholding, for residents of the six reciprocal states and for workers who expect 100% Tax Forgiveness. Pension and IRA payers generally withhold nothing, since those payments are not taxed.

Estimated payments are required for 2026 when income not covered by withholding exceeds $14,000, which is $430 of tax. The threshold was $11,000 for 2025 and rises to $17,000 for 2027 and $20,000 for 2028 under a schedule already in law. Payments are due April 15, June 15 and September 15, 2026 and January 15, 2027 on Form PA-40 ES or in myPATH. The safe harbor is either 90% of the tax actually due for each period or 100% of last year’s net taxable income times 3.07%, with no 110% rule for high earners. Farmers with two-thirds of gross income from farming may pay once by January 15 or file and pay by March 1. Any payment of $15,000 or more must be made electronically; a paper check that size draws a penalty of 3% of the payment, up to $500. The usual people caught by the estimate rules are the self-employed, landlords, anyone with a large stock or property sale, and Pennsylvanians working in a reciprocal state whose out-of-state employer does not withhold Pennsylvania tax.

The second return: local earned income tax

Under Act 32 of 2008, nearly every municipality and school district outside Philadelphia levies an earned income tax on wages and net profits only. It does not touch interest, dividends, gains, pensions, Social Security or unemployment. The combined resident rate is most often 1%, half to the municipality and half to the school district, with higher rates in some cities. The employer withholds the higher of the resident rate where the employee lives and the nonresident rate where the work is done, keyed to the six-digit PSD code on the Residency Certification Form every new hire signs, and remits to one of the county tax collection districts, run by firms such as Berkheimer, Keystone Collections and Jordan Tax Service. The resident then files an annual local return with the home collector by April 15, separate from the PA-40, reconciling what was withheld. A Local Services Tax of up to $52 a year is withheld by the work-location employer, with an exemption below $12,000 of earned income where the rate is above $10. The state return gives no credit for any of it.

Philadelphia is outside Act 32. Its Wage Tax is 3.74% for residents on all wages wherever earned and 3.43% for nonresidents on work done in the city for wages paid July 1, 2025 through June 30, 2026, falling to 3.735% and 3.425% from July 1, 2026 under the city’s published schedule. Residents also owe the Net Profits Tax on self-employment income and the School Income Tax, 3.74% for 2025 with the 2026 rate to come, on dividends, short-term gains and some interest and rents. Reciprocity with New Jersey does not reach Philadelphia: a Cherry Hill resident working in Center City pays the nonresident Wage Tax. The local layer is where this article most needs a Pennsylvania practitioner’s eye.

How to file

The PA-40 is due April 15, 2027. The Department’s free system, myPATH, files the PA-40 with Schedules SP and DC and the Working Pennsylvanians credit at any income, takes payments without an account, and shows refund status. IRS Direct File is not offered for 2026, so the free route is myPATH for the state and a separate federal product. A federal extension is honored automatically if no Pennsylvania tax is due with the return; otherwise file REV-276 or pay in myPATH by April 15. The extension runs to October 15, 2027 and extends only the filing date; interest runs from April 15. Dates and forms are collected in Pennsylvania calendar and forms.

What trips people up

• Using Box 1 instead of Box 16 for wages. Pennsylvania taxes the 401(k) deferral; the two boxes differ for a reason.
• A stock or rental loss expected to reduce wages. It reduces nothing outside its own class and dies at year end.
• A joint return filed to share one spouse’s loss with the other’s gain. Pennsylvania does not allow it.
• The federal tips, overtime or senior deduction expected to reduce Pennsylvania tax. The PA-40 never saw them.
• Schedule UE left blank because the federal return no longer has a place for union dues, tools and uniforms.
• A 529 contribution nobody mentioned, because the federal return did not ask.
• The Working Pennsylvanians credit lost because the federal 1040 was not attached or uploaded.
• Bonus depreciation carried from a federal Schedule C or E. Pennsylvania allows none for individuals.
• Capital gain distributions from a mutual fund put on Schedule D. They are dividends on Schedule B.
• The local earned income tax return never filed, because the W-2 showed withholding and the taxpayer assumed that settled it.