Paying taxes is a regular yearly deed all working people must complete. Tax is an obligatory fee adults are required to pay to the government. Furthermore, the government uses the collected money to finance certain public facilities or services, such as the police force and road construction.
The United States differentiates two taxation types: state income tax and federal income tax. Federal taxes are obtained by the federal government while state taxes are acquired by individual states. In addition, both types of taxations resemble each other, in the sense that they apply percentage rates to taxable earnings. However, they differ significantly in terms of those rates and how they’re applied, as well as the types of income that are taxed along with the deductions and tax credits that are available.
The state of Pennsylvania has a distinctive tax system for personal income. Along with eight other states, it applies a flat rate system, which means all citizens must pay a singular tax rate, no matter their income level.
When filing their yearly tax returns, people sometimes question what income is not taxable, particularly in Pennsylvania. Depending on the source income and special circumstances, there are several non-taxable classes of income.
Pennsylvania Tax System
As previously mentioned, Pennsylvania is one of the nine states employing a flat rate taxation system. Its citizens must pay individual income tax at a 3,07% flat rate. According to The Balance, Pennsylvania is a state with the second-lowest flat rate in the U.S, only above North Dakota (2,9% flat rate).
However, Pennsylvania law does not acknowledge standard deductions or personal exemptions for individuals, spouses, or dependants. For instance, unlike federal laws, it doesn’t allow deductions such as medical and dental fees as well as charity aid.
Deductions are restricted to employment-associated expenses, inputs to medical and health saving plans along with particular educational saving plans.
On some occasions, the state government can cancel tax debts, but only if an individual’s income is below the required poverty level. For example, if an individual files for bankruptcy, the IRS (the Internal Revenue Service) can legally discharge the mentioned debtor from liability and will not require them to pay future compensations.
Learn here about whether or not does Pennsylvania tax Roth IRA.
Taxable Income
People most commonly receive compensation in three manners: through the property, money, and providable services. In addition, the IRS can collect tax on income that isn’t yet in the individual’s ownership. For instance, checks an individual has earned but hasn’t converted into money are considered taxable for the year the checks were received in.
The state of Pennsylvania evaluates and taxes eight classes of income:
● Compensation
● Interest
● Dividends
● Net gains from a profession, business, or farm work
● Net profit from transferring, selling, or gifting property
● Earnings from royalties, rents, patents rights as well as intellectual property
● Revenue from properties and trusts
● Gambling and lottery prizes (with the exception of non-cash winnings)
Non-Taxable Income
In the category of non-taxable income refer earnings that are received but not subjected to taxation according to the federal and state laws. However, it is important to mention that even if some forms of payment are not susceptible to tax, they still need to be written down on the tax returns.
According to the Personal Tax Income laws by the state of Pennsylvania, the following income is always exempt from tax:
● State-approved private and public pension plans after reaching a specific age
● IRA distributions and Roth IRA income (Check out the 5-year rule for Roth IRA)
● Social Security income
● Government payments for foster care
● Child support
● Alimony
● Income from active military service outside of PA
● Sick leave payments outside of regular earnings, such as third-party insurance
● Financial aid from an employer for the purpose of higher education
● Income received under workmen’s compensation or Occupational Disease Acts
● Life insurance income (there are certain exceptions) and settlements
● Income owed to a decedent prior to death (IRD)
● Group term life insurance premiums provided by an employer
● Unemployment reimbursements or public assistance provided by the government
● Private use of employer-owned or leased possessions or services (company vehicles, parking facilities)
● Gifts
● Strike compensation
● GI Bill benefits
● Awards not granted for prior or future services
Finally, Pennsylvania is a state that fully clears all income from retirement plans as well as Social Security payments from tax susceptibility. As such it is an ideal state for retirees looking to relocate or settle down. It would be best to meet with a certified financial consultant in Pittsburgh PA to help you out make the right decisions related to your finances.
Disclosure: Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. This information is not intended to be a substitute for specific individualized tax, legal, or investment related advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.
This material was prepared for The Kelley Financial Group’s use.