What the Tax Forgiveness Credit is

The Tax Forgiveness Credit is Pennsylvania's primary low-income personal income tax relief. Eligible filers can have all or part of their PA personal income tax forgiven, depending on their eligibility income and household size. Refunds of any PA tax withheld are issued through the PA-40 like any other refund.

The relief is significant for filers near the eligibility thresholds. For many lower-income households, 100% of PA tax owed is forgiven and any PA withholding is refunded in full.

Eligibility income — different from taxable income

The single most important concept to grasp about Schedule SP is that eligibility incomeis not the same as PA taxable income. Eligibility income is a broader measure designed to capture the household's real financial picture. It includes:

  • Everything on the PA-40 as taxable income.
  • Social Security benefits (which PA does not tax).
  • Distributions from qualified retirement plans (401(k), IRA, pension), which PA generally does not tax.
  • Alimony received.
  • Gifts and bequests.
  • Inheritances and life insurance proceeds.
  • Nontaxable employer contributions and certain other excluded items.

Two filers with identical PA-40 taxable income can have very different eligibility income — and therefore very different Schedule SP outcomes — depending on their nontaxable income.

Who typically qualifies

Schedule SP's thresholds scale with household size. The most common categories of eligible filers:

  • Retirees living primarily on Social Security and modest pension or retirement distributions.
  • Single parents with dependent children.
  • Students with limited summer or part-time income.
  • People with disabilities living on a combination of disability income and modest wages.
  • Lower-wage workers in larger households.

How the sliding scale works

The specific dollar thresholds depend on filing status and dependents and are updated periodically. Always run the Schedule SP worksheet for the current tax year — the Pennsylvania Department of Revenue publishes the current thresholds and the tier percentages.

How to claim it on Schedule SP

Three concrete steps:

  1. Compute eligibility income on Part B of Schedule SP. Include nontaxable items.
  2. Compare to the current eligibility income table for your filing status and dependents to determine the forgiveness percentage.
  3. Apply the percentage to your PA-40 tax liability. The forgiveness amount carries onto the PA-40 as a credit.

Schedule SP must be attached to the PA-40. myPATH and most tax software handle this automatically once you complete the Schedule SP questionnaire.

Why eligible filers miss it

The most common reasons eligible Pennsylvanians never claim Tax Forgiveness:

  • They never file a PA-40 because they think no PA tax is owed.
  • They use taxable income, not eligibility income, in the test — and conclude they don't qualify when they do.
  • Retirees miss the credit because retirement income isn't taxable in PA — but it still counts toward eligibility income.
  • They confuse Schedule SP with the federal earned income tax credit (EITC). These are separate credits with separate eligibility rules.

Interactions with other credits and refunds

Tax Forgiveness interacts with PA withholding and other credits:

  • It can refund PA tax that was withheld even if you owed no PA tax to begin with.
  • It generally takes priority before other PA credits because it phases tax owed down to a forgiven amount.
  • It does not affect the federal return. The federal EITC is a parallel — and separate — federal credit.
  • If you missed Tax Forgiveness in a prior year, file an amended PA-40 within the statute of limitations to recover the refund.