Does Pennsylvania Have State Income Tax?
Understand Pennsylvania's approach to personal income tax. This guide clarifies how state-level rules and distinct local obligations combine to shape your tax liability.
Pennsylvania imposes a personal income tax on its residents. This tax applies broadly to income earned or received by individuals, estates, and trusts. The state’s system is distinct from the federal income tax system and has its own set of rules and regulations that determine how and when income must be reported.
Pennsylvania’s State Income Tax Rate and Structure
Pennsylvania utilizes a flat tax system for personal income, which is a departure from the progressive, bracket-based system used by the federal government. This structure means that all taxpayers, regardless of their total income, are subject to the same tax rate. For the 2024 and 2025 tax years, the personal income tax rate is 3.07%.
Taxable vs. Non-Taxable Income
Pennsylvania law specifies eight classes of income that are subject to the personal income tax.
- Compensation
- Interest and dividends
- Net profits from the operation of a business, profession, or farm
- Net gains or income from the sale or disposition of property
- Net gains from rents, royalties, patents, and copyrights
- Income derived from estates or trusts
- Gambling or lottery winnings
A rule of Pennsylvania’s tax code is that losses in one class of income cannot be used to offset gains in another. For example, a net loss from a rental property cannot be deducted from a taxpayer’s compensation or interest income. Each of the eight income classes is measured independently, and the tax rate is applied to the net positive income within each applicable category.
Certain types of income are specifically exempt from state taxation. Social Security benefits and most forms of retirement income are not taxed. This includes payments from 401(k)s, IRAs, and eligible pension plans for individuals who have reached retirement age. Inheritances and gifts are not considered income for state tax purposes.
Understanding Local Income Taxes
Beyond the statewide income tax, many residents of Pennsylvania are also subject to local income taxes. These taxes are in addition to the 3.07% state tax. They are administered and collected by local governments, such as municipalities and school districts, to fund community services.
There are two primary forms of local income tax. The most common is the Earned Income Tax (EIT), which is a percentage-based tax levied on earned income like wages, salaries, and net profits from a business. The second is the Local Services Tax (LST), a flat-dollar occupational tax, often amounting to $52 per year, withheld from employee paychecks. The specific rates and rules for these local taxes vary significantly depending on where an individual lives and works.
Filing Requirements for Pennsylvania State Tax
The obligation to file a Pennsylvania Personal Income Tax Return (PA-40) is based on specific income thresholds. A return must be filed if an individual, either resident or nonresident, received more than $33 in total Pennsylvania gross taxable income during the year. This requirement holds even if no tax is ultimately due.
A filing requirement also exists for any individual who experienced a financial loss from any transaction. This applies to losses incurred as an individual, a sole proprietor, a partner in a partnership, or a shareholder in an S corporation. Even if a person’s overall income is below the $33 threshold, incurring a reportable loss from one of these activities necessitates filing a PA-40 return to document the loss.