Pennsylvania Featured

Pennsylvania Taxable and Non Taxable Income

Understanding What Income is Taxable and Non-Taxable in Pennsylvania

BS

Business Tax Specialist

Tax Expert

4 min read
Published on 3 months ago
/KB/static/images/income.jpg

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.

OLT Free Filing

File Your Taxes With These Updates Automatically Applied

OLT automatically applies the latest IRS rules and calculates your deductions.

Automatic tax updates Deduction calculations included

Key Takeaways

  • Understanding tax deductions can significantly reduce your tax liability
  • Keep detailed records of all tax-related expenses and documents
  • Consult with a tax professional for complex situations

Tags

Related Articles

PA State Tax Reciprocity
Pennsylvania 3 min read

PA State Tax Reciprocity

Understanding Tax Reciprocity Between Pennsylvania and Other States

Pennsylvania Tax Forgiveness
Pennsylvania 3 min read

Pennsylvania Tax Forgiveness

Explore Opportunities for Tax Relief in Pennsylvania

Pennsylvania Filing and Residency Determination
Pennsylvania 3 min read

Pennsylvania Filing and Residency Determination

Understanding the Requirements for Filing and Residency in Pennsylvania