Pennsylvania Taxable and Non-Taxable Income
Pennsylvania taxes eight distinct classes of income for individual taxpayers. Understanding what is taxable and what is not is essential for accurate filing of the PA-40, Pennsylvania Individual Income Tax Return.
Taxable Income in Pennsylvania
According to Pennsylvania tax rules, the following types of income are subject to state income tax:
- Compensation: Wages, salaries, bonuses, and other payments for services rendered.
- Interest: Interest income from various sources, except as exempted.
- Dividends: Dividend income from corporations, unless exempt.
- Net profits from business, profession, or farm: Income from self-employment or operating a business.
- Net gains from property dispositions: Capital gains from the sale of property.
- Rents, royalties, patents, and copyrights: Income from leasing property or intellectual property rights.
- Income from estates or trusts: Distributions received from trusts or estates.
- Gambling and lottery winnings: All winnings from gambling or lotteries are taxable.
Non-Taxable Income in Pennsylvania
The following types of income are not taxable for Pennsylvania personal income tax purposes:
- Interest, dividends, and gains from exempt direct obligations of the Commonwealth of Pennsylvania or its political subdivisions.
- Interest, dividends, and gains from direct obligations of the U.S. government.
- The value of employer-paid benefits not included on federal Form W-2.
- Refunds of federal taxes and credits that were not deducted for PA purposes.
Taxable Income Calculation on PA-40
On Form PA-40, taxpayers report their total PA-taxable income across multiple lines:
- Line 1: Total earned income (wages, salaries, etc.).
- Line 2: Allowable employee business expenses (requires PA-UE form).
- Line 3: Other taxable earned income (not included in Line 1 or 5).
- Line 4: Total taxable earned income (Line 1 minus Line 2 plus Line 3).
- Line 5: Other income (e.g., interest, dividends, capital gains).
- Line 6: Losses or deductions (if applicable).
- Line 8: Total PA-taxable income (sum of Lines 4 through 7).
Tax rates vary based on location and income level. For example, for total PA-taxable income of $38,000, the tax rate varies by county: $17 in Philadelphia, $14 in Allegheny County, and $12 in the remainder of Pennsylvania.
Important Notes for Filers
- Always refer to the official PA Personal Income Tax Guide for detailed guidance.
- Use Form PA-40 for individual returns and attach required schedules (e.g., Schedule D for business gains).
- Nonresident taxpayers must report nonresident withholding on Line 17 of PA-40 or Line 14 of PA-41.
- For pass-through entities (S-corporations, partnerships), use Schedule RK-1 to report distributive shares.
Source:
Form PA-40 - Pennsylvania Personal Income Tax Return
PA Forms and Publications
Schedule RK-1 - Resident Schedule of Shareholder/Partner/Beneficiary Pass Through Income, Loss and Credits
Note: Always verify with official Federal or State Department of Revenue Forms and Instructions before filing.