A Breakdown of Pennsylvania State Taxes

This article covers the personal income tax structure, sales and use tax regulations, and the state’s inheritance tax. Property taxes are not covered here, as they are managed and collected by local government bodies, including counties, municipalities, and school districts, rather than the state.

Pennsylvania Personal Income Tax

Pennsylvania utilizes a flat tax system for personal income, meaning every resident pays the same state income tax rate regardless of their income level. The rate is a flat 3.07 percent and applies to all taxable income. This is a more straightforward calculation than the graduated brackets used by the federal government and many other states.

The commonwealth taxes eight classes of income:

• Compensation
• Interest
• Dividends
• Net profits from a business, profession, or farm
• Net gains from the sale of property
• Net income from rents, royalties, patents, and copyrights
• Income from estates or trusts
• Gambling or lottery winnings

A feature of this system is that losses in one category of income cannot be used to offset gains in another. For example, a net loss from a rental property cannot reduce the taxable income earned from a person’s primary employment.

Common examples of taxable income include compensation (salaries, wages, tips), interest from savings or bonds, and dividends. The tax also applies to net profits from a business, net gains from selling property like stocks or real estate, rental income, and all gambling or lottery winnings.

Certain types of income are specifically exempt from Pennsylvania’s personal income tax. Social Security benefits and most forms of retirement income are not taxed. This includes payments from 401(k)s, IRAs, and pension plans for individuals who have reached retirement age, which provides a tax benefit to retirees living in the state.

Tax Forgiveness Credit

For lower-income individuals and families, Pennsylvania offers a Tax Forgiveness Credit that can reduce or eliminate their state tax liability. This credit is based on the filer’s eligibility income, number of dependents, and filing status. To qualify, a filer’s total eligibility income must fall below certain thresholds.

Eligibility income is a specific calculation that includes regular taxable income but also adds back certain non-taxable sources, such as untaxed retirement benefits and Social Security payments. The credit is calculated on a sliding scale, providing a percentage of forgiveness that decreases as income approaches the maximum limit.

Pennsylvania Sales and Use Tax

The Commonwealth of Pennsylvania levies a statewide sales tax of 6 percent on the purchase of most tangible personal property and certain services. This tax is collected by the seller and remitted to the Department of Revenue. In addition to the state rate, Allegheny County adds an additional 1 percent, and the city of Philadelphia adds 2 percent, leading to higher combined rates in those areas.

The tax applies broadly to goods such as furniture, appliances, and electronics. It also extends to a specific list of services, including lawn care, lobbying services, and commercial cleaning services.

Many items are exempt from the state’s sales tax, providing relief on necessary purchases. Most clothing, with the exception of formal wear and athletic apparel, is not taxed. Groceries and other unprepared food items are also exempt, though this does not apply to ready-to-eat items. Other exemptions include:

• Prescription and non-prescription drugs
• Residential heating fuels like natural gas and electricity
• Textbooks

Use Tax

Pennsylvania’s use tax complements the sales tax and applies at the same rate. It is owed when a resident buys a taxable item for use in the state but does not pay Pennsylvania sales tax at the time of purchase, such as from an out-of-state online retailer.

For example, if a resident buys furniture online for $1,000 from a company that does not add the 6 percent sales tax, the resident must remit that $60 to the state as use tax. This ensures local businesses are not at a competitive disadvantage. Individuals can report and pay use tax on their annual PA-40 personal income tax return or through the state’s online payment portal.

Pennsylvania Inheritance Tax

Pennsylvania is one of a handful of states that imposes an inheritance tax. This tax is paid by the beneficiaries who receive inherited property, not by the deceased person’s estate. This structure differs from a federal estate tax, which is a tax on the total value of a person’s assets at the time of death.

The tax rate is determined by the beneficiary’s relationship to the deceased:

• 0% for transfers to a surviving spouse or to a parent from a child aged 21 or younger
• 4.5% for direct descendants, such as children and grandchildren
• 12% for siblings
• 15% for all other beneficiaries, including nieces, nephews, and friends

Charitable organizations, exempt institutions, and government entities are exempt from paying inheritance tax on bequests they receive.

The tax applies to most assets passed to beneficiaries, including Pennsylvania real estate, bank accounts, stocks, and other investments. An asset’s value is assessed as of the date of death, and the tax is calculated on the net value transferred to each heir after deductions. The estate’s executor is responsible for filing the Inheritance Tax Return, and each beneficiary is responsible for paying the tax on their share.

Filing and Paying Your State Taxes

Taxpayers have several options for submitting their Pennsylvania Personal Income Tax return and payments. The state encourages electronic filing through its online portal, myPATH, which allows for the free filing of the PA-40 tax return and related schedules. Taxpayers can use myPATH with or without creating an account.

For those who prefer paper filing, forms can be downloaded from the Department of Revenue’s website and mailed. Payments can be made via electronic funds transfer or a credit/debit card when filing online, though card payments may involve a third-party processing fee. If filing by mail and owing tax, a check or money order made payable to the “PA Department of Revenue” should be included with the return.

The deadline for filing the annual personal income tax return and paying any tax owed is April 15. If this date falls on a weekend or holiday, the deadline moves to the next business day. An extension to file can be requested, but this does not extend the deadline to pay any tax due.