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Pennsylvania Income Tax: 3.07% Flat Rate & Full Retirement Exemption

3.07% Flat Rate • All Retirement Income Exempt • No Capital Gain Preference • Local EIT • Inheritance Tax
72 P.S. §730372 P.S. §730172 P.S. §9116
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Pennsylvania has one of the lowest flat state income tax rates in the country at 3.07%, and it is one of the most retirement-friendly states: Social Security, pensions, IRA distributions, 401(k) distributions, and all other retirement income are completely exempt from Pennsylvania personal income tax. A retiree with $200,000 of pension and IRA income pays zero Pennsylvania income tax on that income. However, Pennsylvania's apparent simplicity is complicated by a dense network of local earned income taxes (EIT) imposed by municipalities and school districts, and by an inheritance tax that applies to transfers to non-spouse beneficiaries at rates up to 15%.

Pennsylvania 2026 Key Numbers

State income tax rate: 3.07% flat on all taxable income. No graduated brackets.

Retirement income: Fully exempt - Social Security, pensions, IRAs, 401(k), 403(b), and all distributions from qualified plans are excluded from Pennsylvania taxable income with no age or income limit.

Capital gains: No preferential rate. All capital gains - short-term and long-term - taxed at 3.07%. Pennsylvania does not conform to the federal preferential capital gains rates.

Local earned income tax: Most Pennsylvania municipalities impose an earned income tax of 1% to 3.5% in addition to state tax. Philadelphia residents pay 3.75% city wage tax. Non-residents working in Philadelphia pay 3.44%.

Inheritance tax: 0% to spouse, 0% to charity, 4.5% to lineal descendants (children, grandchildren), 12% to siblings, 15% to all others.

Local Earned Income Taxes: The Hidden Pennsylvania Tax

Pennsylvania is unique among states in having a pervasive system of local earned income taxes. Every municipality and school district may impose its own EIT on wages and self-employment income earned within its borders. The combined local EIT typically ranges from 1% to 3.5% depending on location. A Philadelphia resident pays 3.07% state tax plus 3.75% city wage tax on wages, for a combined 6.82% rate - making Philadelphia one of the higher-tax cities in the country despite Pennsylvania's low state rate. Employers are required to withhold local EIT, and employees must file local EIT returns in addition to their state returns.

Capital losses in Pennsylvania cannot offset capital gains from different classes. Pennsylvania has a unique "classification" system for income - it categorizes income into eight classes, and losses from one class generally cannot offset gains from another class. A taxpayer who has a loss from business operations cannot offset that loss against capital gains from stock sales. This differs significantly from the federal treatment where various types of losses can offset various types of income.

Pennsylvania Inheritance Tax

Pennsylvania imposes an inheritance tax on transfers of property owned by Pennsylvania decedents. Unlike the federal estate tax (which taxes the estate), Pennsylvania's inheritance tax is imposed on the recipient. Transfers to spouses: 0%. Transfers to lineal descendants (children, grandchildren, parents): 4.5%. Transfers to siblings: 12%. Transfers to all other persons (nieces, nephews, friends, unmarried partners): 15%. Jointly held property passes to the surviving joint owner at a reduced rate. Life insurance proceeds payable to a named beneficiary are generally exempt. The inheritance tax return is due 9 months after the decedent's death.

Related Topics
State & Compliance HubAll state tax topics New Jersey TaxNJ also has inheritance tax - compare rates and classes RMD GuideIRA distributions fully exempt from Pennsylvania income tax Estate Tax GuidePennsylvania inheritance tax vs. federal estate tax SALT PlanningPennsylvania PTET election for pass-through entities No Income Tax States3.07% plus local EIT - compare to zero-tax states
Authority: 72 P.S. §7303 (Pennsylvania personal income tax rates - 3.07% flat rate; eight classes of income; losses within a class may offset gains within same class only); 72 P.S. §7301(d) (retirement income exclusion - distributions from IRAs, 401(k), 403(b), pensions, annuities, and Social Security all exempt from Pennsylvania personal income tax; no age or income threshold); Philadelphia Code §19-1500 et seq. (Philadelphia wage tax - 3.75% for residents; 3.44% for non-residents working in Philadelphia); Local Tax Enabling Act 53 P.S. §6924.101 (local earned income tax authority - municipalities and school districts may levy EIT on earned income; combined rate varies by location); 72 P.S. §9116 (Pennsylvania inheritance tax rates - 0% spouse and charity; 4.5% lineal descendants and ancestors; 12% siblings; 15% all others; return due 9 months after death; 5% discount for prepayment within 3 months).