What Is Tax Forgiveness in PA and Who Qualifies?

Tax Forgiveness in Pennsylvania is a state credit that reduces or eliminates the personal income tax owed by lower-income residents. It applies only to Pennsylvania’s flat 3.07 percent personal income tax, and it works on a sliding scale: a single filer with no dependents and eligibility income of $6,500 or less pays nothing, with partial credits available up to $8,750.¹ Married couples and households with dependents qualify at much higher incomes. The credit has nothing to do with federal taxes or local earned income taxes.

Who Qualifies

Two things have to be true. You must have been a Pennsylvania resident for at least part of the tax year, and you must have some PA personal income tax liability for the credit to offset. Full-year residency isn’t required, but you have to have been subject to PA tax while you lived in the state.¹

The program covers single filers, married couples filing jointly or separately, and separated or deceased taxpayers. If you’re married, both spouses’ incomes are combined to test eligibility even when you file separate returns.¹ Being claimed as a dependent on someone else’s federal return doesn’t automatically disqualify you; you can still claim Tax Forgiveness on your own PA return if your eligibility income is low enough. One exception applies to full-time college students claimed as a parent’s dependent: they generally can’t claim Tax Forgiveness unless the parents are themselves eligible.²

How Eligibility Income Is Calculated

This is where most people get the answer wrong. The income figure the state uses isn’t the taxable income on your PA-40. It’s a broader number called eligibility income, and it pulls in both taxable and nontaxable money so the Department of Revenue can see your actual financial picture.³

On top of regular wages, interest, and business income, eligibility income includes:

Alimony you received, counted in full even though PA doesn’t tax it.
Gambling and lottery winnings, gross, with no reduction for losses.
Insurance proceeds, including life insurance payouts.
Nontaxable gifts of cash or property, plus prizes and awards.
Inheritances, including the value of inherited property.
Tax-exempt interest, such as interest on government bonds.

Several common income sources are left out of the calculation entirely, and the exclusions change the math dramatically for a lot of households:

Social Security benefits, fully excluded.
Retirement and pension benefits paid after reaching a specified age or completing a required period of service. This covers most traditional pension distributions.
Workers’ compensation, occupational disease benefits, and periodic payments for sickness or disability.
Public assistance and unemployment compensation.
Combat and hazardous duty pay, including military differential pay.
Civil Service annuities.
Damage awards for physical injury or sickness, including pain and suffering settlements.
Personal use of employer property or services, and employer or union payments for hospitalization, disability, or death programs.³

The Social Security and pension exclusions are the ones that surprise people. A retiree living on Social Security and a modest pension can show an eligibility income near zero even after receiving tens of thousands of dollars during the year, and that retiree can qualify for full forgiveness on any PA tax owed on other income.

The Income Thresholds

Forgiveness works in 10 percent steps separated by $250 of income. If you fall at or below the lowest threshold, 100 percent of your PA income tax is forgiven. Each additional $250 of eligibility income drops the credit by 10 percentage points until it phases out.

Single Filers, No Dependents

100 percent forgiveness: up to $6,500
90 percent: up to $6,750
80 percent: up to $7,000
70 percent: up to $7,250
60 percent: up to $7,500
50 percent: up to $7,750
40 percent: up to $8,000
30 percent: up to $8,250
20 percent: up to $8,500
10 percent: up to $8,750

Above $8,750, a single filer with no dependents gets nothing.¹

Married Couples, No Dependents

Every married threshold is exactly double the single number. Combined eligibility income up to $13,000 qualifies for 100 percent forgiveness, with the credit stepping down by 10 points per $250 and ending at $15,250 for 10 percent forgiveness.¹ Both spouses’ eligibility income counts whether the return is joint or separate.

Add $9,500 Per Dependent Child

Each dependent child adds $9,500 to every threshold in the table. A single parent with two children qualifies for full forgiveness up to $25,500 of eligibility income and partial forgiveness up to $27,750. A married couple with two children can earn up to $34,250 and still get at least 10 percent back.¹

A dependent child for Schedule SP is any minor or adult child you claim as a dependent on your federal return. Federal rules on age, student status, and disability control the question, so an adult child you can claim federally because of a disability also counts for Tax Forgiveness.²

Part-Year Residents and Active Duty Military

If you moved into or out of Pennsylvania during the year, you can still claim the credit, but your eligibility income has to include everything you earned while living outside the state, taxable or not, as if you’d been a resident all year. Those out-of-state amounts go on Line 6 of Schedule SP. Paper filers attach page one of the federal return.⁴

Active duty military pay earned while serving full-time outside Pennsylvania isn’t subject to PA income tax and doesn’t appear on Line 1a of the PA-40, but it still has to be included in eligibility income on Schedule SP. Combat zone and hazardous duty pay are the exception; those are excluded.⁵

How to Claim It

Tax Forgiveness is not automatic. You have to fill out Schedule SP (Special Tax Forgiveness) and submit it with your PA-40.¹ Skip the schedule and the credit won’t be applied, no matter how plainly you qualify.

Schedule SP asks you to list every source of eligibility income, taxable and nontaxable, pulling specific line items from your PA-40, and to enter your number of dependents so the form lands on the correct row of the income table. Disclose every nontaxable source. Leaving one off can trigger a processing delay or an adjustment notice.

The quickest filing route is myPATH, the state’s online portal, which runs the calculations and checks for missing entries before you submit.⁶ Paper returns with Schedule SP attached are also accepted. The deadline for tax year 2025 returns is April 15, 2026.⁷

School District Income Tax

If you live in a Pennsylvania school district that levies its own personal income tax, the same forgiveness percentage carries over. A filer who qualifies for 90 percent forgiveness on the state tax also receives 90 percent forgiveness on the school district tax.⁸ A lot of eligible filers never claim this piece.

If You Missed It, You Can Still File an Amended Return

Realizing after the fact that you qualified doesn’t cost you the credit permanently. Pennsylvania accepts amended returns for up to three years after the original or extended due date. File a corrected PA-40 with Schedule SP attached and the Department of Revenue will apply the credit retroactively. Because the income thresholds haven’t moved since 2004, taxpayers whose incomes have been stable may find that they could have claimed Tax Forgiveness in several prior years as well.

1
Department of Revenue. Tax Forgiveness
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Pennsylvania Department of Revenue. PA Schedule SP – Special Tax Forgiveness
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Pennsylvania Department of Revenue. PA Personal Income Tax Guide – Tax Forgiveness
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Department of Revenue. Tax Forgiveness
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Department of Revenue. Military Pay for PA Personal Income Tax Purposes
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Department of Revenue. myPATH
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Department of Revenue. Shapiro Administration Launches New Fast File Initiative to Simplify Filing PA Tax Returns for Eligible Pennsylvanians
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Cornell Law School. 61 Pa Code 144.2 – Poverty Credit