Pennsylvania Gov. Josh Shapiro signed the state's $50.1 billion 2025-26 budget on November 12, 2025, well into the fiscal year it covers, according to the governor's office. The deal creates a refundable state credit for working families and continues trimming the corporate income tax. It leaves the 3.07% flat personal income tax rate unchanged, which remains the most important number for high-income Pennsylvania households.
What changed
The centerpiece for individuals is the Working Pennsylvanians Tax Credit. The Department of Revenue says it equals 10% of the federal earned income tax credit, up to $805, and is refundable, so eligible filers receive it even if they owe no state tax. The department estimates $193 million in relief for about 940,000 residents, and the credit is calculated automatically on the PA-40 for filers who claim the federal credit, starting with the 2026 filing season.
The governor's office listed other tax changes in the package: an additional half-point cut to the corporate net income tax, an expanded Property Tax/Rent Rebate program, a continued employer child care contribution credit, a new state deduction for student loan interest and an expanded child and dependent care credit.
Who is affected
The new credit is tied to the federal earned income credit, which is aimed at low- and moderate-income workers, so most readers of this publication will not qualify. High earners are affected mainly by what did not change. The personal income tax is still levied at a single 3.07% rate on residents and nonresidents with Pennsylvania income, with no higher brackets for larger incomes. Business owners organized as C corporations benefit from the continued corporate rate reduction; those operating through pass-through entities pay the individual rate on their share of profits.
The after-tax math
A flat rate makes state tax on wages easy to estimate, but Pennsylvania's structure has a quirk that matters more to affluent households than the rate itself. The state taxes eight separate classes of income: compensation, interest, dividends, business profits, gains from property sales, rents and royalties, estate and trust income, and gambling winnings. According to the Department of Revenue, a loss in one class cannot offset income in another, and gains or losses cannot be carried to other years.
Example, with round numbers: a Philadelphia-area couple earns $600,000 in wages. In the same year they sell a stock portfolio at a $100,000 loss and a rental property at a $40,000 gain.
| Income class | Amount | Pennsylvania treatment |
|---|---|---|
| Compensation | $600,000 | Taxed at 3.07%: $18,420 |
| Net gains from property | $40,000 gain minus $100,000 loss | Net loss of $60,000; no tax, and the loss is not usable against wages |
| Unused loss carried to next year | $60,000 | Not allowed |
Because both sales fall in the same class, the stock loss wipes out the rental gain within that class, but the remaining $60,000 simply disappears for state purposes. Timing sales so that gains and losses land in the same Pennsylvania tax year can therefore carry real weight for residents, independent of how the same transactions are treated on the federal return. Any local taxes are separate and not reflected in this example.
Moves to discuss with your advisor
- Whether large capital gains and losses expected over the next two years can be realized in the same calendar year for Pennsylvania purposes.
- How the lack of state loss carryforwards affects the value of federal tax-loss harvesting for residents.
- For business owners, whether the ongoing corporate rate cuts change the comparison between C corporation and pass-through structures.
- Whether family members with modest wages, such as adult children, may be eligible for the new refundable credit.
What to watch
The Department of Revenue will publish PA-40 instructions reflecting the new credit and deduction for the 2026 filing season. Negotiations over the 2026-27 budget will show whether lawmakers extend the corporate rate reductions or revisit individual income tax, which this deal left at 3.07%.
Sources
- First reported Gov. Shapiro Signs 2025-26 Budget into Law — Commonwealth of Pennsylvania
- Working Pennsylvanians Tax Credit — Pennsylvania Department of Revenue
- Personal Income Tax — Pennsylvania Department of Revenue
After TAX is an independent publication. Articles are general information, not tax, legal or investment advice. Consult a licensed professional about your situation.
