Pennsylvania levies a flat 3.07% personal income tax — among the lowest statutory rates in the nation — but the state's treatment of income diverges sharply from federal rules in ways that routinely catch individuals and businesses off guard. Pennsylvania does not allow the federal standard deduction, itemized deductions, or most above-the-line adjustments; income is instead calculated using eight separate classification categories, each with specific inclusion and exclusion rules.

Pennsylvania does not permit net operating loss (NOL) deductions for business income as defined under federal rules — a significant departure that can result in taxable income at the state level even when a business reports a federal loss. Pennsylvania also taxes capital gains in full at the 3.07% personal income rate regardless of holding period, with no preferential rate for long-term gains — a material consideration for investors, real estate sellers, and business owners planning a sale.