What Are Each State's Income Tax Rates?
Every U.S. state has its own income tax rates, in addition to the federal taxes that you must pay every year.
Some localities even have local income taxes you have to pay, too.
Recently, some people have opted to move to a state with lower taxes to minimize the amount paid in taxes.
This trend has accelerated after the coronavirus pandemic. For instance, you commonly hear of wealthy people leaving New York to live in Florida.
Once companies realized many of their workers could successfully work remotely, it opened up the opportunity for many to live wherever there is a stable internet connection.
As you can imagine, this has made state taxation even more complex than it already was.
Thankfully, there are some general rules of thumb to follow.
As far as state income taxes go, seven states did not collect individual income taxes in 2020. The others have state income taxes on earned income or other income of up to 13.3%.
Here’s a quick summary of state income taxation. It is followed by other information you may find helpful if you’re considering moving to save money on taxes.
States With No Income Taxes
These are the U.S. states that did not impose any state income tax in 2020:
- South Dakota
Tennessee joins this list in 2021. New Hampshire will also join this list in the future based on its current laws phasing out their state income tax.
Just because these states don’t impose income taxes doesn’t mean they don’t have other taxes. For instance, Texas is known for high property taxes and Florida has sales taxes.
State Income Tax Rates
The U.S. states with state income taxes may impose a flat rate or progressive rates.
- Flat rate: The same tax rate applies to all income levels
- Progressive rates: Higher income levels are taxed at a higher percentage rate. Essentially, the higher the income, the more state income tax paid.
The following state income tax rates apply to single filers for the 2020 tax year:
- Alabama: 2% to 5%
- Alaska: None
- Arizona: 2.59% to 4.50%
- Arkansas: 2% to 6.6%
- California: 1% to 12.3% (additional 1% on taxable income over $1 million)
- Colorado: 4.63%
- Connecticut: 3.0% to 6.99%
- Delaware: 0% to 6.6%
- Florida: None
- Georgia: 1% to 5.75%
- Hawaii: 1.4% to 11%
- Idaho: 1.125% to 6.925%
- Illinois: 4.95%
- Indiana: 3.23%
- Iowa: 0.33% to 8.53%
- Kansas: 3.1% to 5.7%
- Kentucky: 5%
- Louisiana: 2% to 6%
- Maine: 5.8% to 7.15%
- Maryland: 2% to 5.75%
- Massachusetts: 5%
- Michigan: 4.25%
- Minnesota: 5.35% to 9.85%
- Mississippi: 3% to 5%
- Missouri: 1.5% to 5.4%
- Montana: 1% to 6.9%
- Nebraska: 2.46% to 6.84%
- Nevada: None
- New Hampshire: 5% (only on dividends and interest income)
- New Jersey: 1.4% to 10.75%
- New Mexico: 1.7% to 4.9%
- New York: 4% to 8.82%
- North Carolina: 5.25%
- North Dakota: 1.1% to 2.9%
- Ohio: 0% to 4.797%
- Oklahoma: 0.5% to 5%
- Oregon: 4.75% to 9.9%
- Pennsylvania: 3.07%
- Rhode Island: 3.75% to 5.99%
- South Carolina: 0% to 7%
- South Dakota: None
- Tennessee: 1% (only on dividends and interest income)
- Texas: None
- Utah: 4.95%
- Vermont: 3.35% to 8.75%
- Virginia: 2% to 5.75%
- Washington: None
- West Virginia: 3% to 6.5%
- Wisconsin: 4% to 7.65%
- Wyoming: None
- District of Columbia (D.C): 4% to 8.95%
How State Incomes Taxes Are Collected
Like with federal income taxes, state and local taxes are typically collected automatically through every paycheck.
At the end of the year, you file a state individual income tax return. This reconciles your withholdings with the actual amount of tax you owe.
If your withholding was not sufficient, you’d have to make a payment with the state income tax returns you submit to make up the difference.
What Happens If You Work in One State and Live in Another?
It’s not uncommon in today’s world to work in one state and live in another.
This is especially true for large metropolitan areas that are near state borders.
A person may live in northern Virginia and work in southern Maryland. Similarly, a person may work in New York City but live in New Jersey.
In some of these cases, you may have to file two state tax returns.
You file a resident state tax return where you live. You may have to file a non-resident state tax return where you work, too.
The good news:
You don’t have to pay double state income taxes in most cases.
Instead, a state usually gives you a tax credit for the state tax paid in the other state.
These situations make for somewhat complex state income tax consequences. The actual impact will vary depending on the particular states in question.
Some States Have Agreements With Each Other
Many states have agreements in place with neighboring states.
These agreements declare how the taxation will work. They’re called reciprocal agreements.
The agreements usually allow a person to only file a state income tax return in their state of residence.
This makes your life much easier, but only if a reciprocal agreement is in place.
Check with your state’s taxation department to see if these agreements are in place for your situation.
Unfortunately, the pandemic has made some people’s lives crazier than ever.
With remote work becoming so popular, it may be possible to live and work remotely in one state for an employer in another state.
These states may be on opposite sides of the country.
For instance, a person may have worked for Facebook in California but temporarily relocated to their parents’ home in Wisconsin during the pandemic.
Wisconsin and California tax laws don’t likely account for these situations. Employees living in Wisconsin and working for a California company are virtually impossible except for remote work in this instance.
In these situations, it’s essential to speak with a tax expert knowledgeable in state tax laws. They can help you determine where you need to pay state income tax and how to minimize your tax liability.
Considering Moving to Save Money on Taxes?
If you’re considering moving to another state to save money on taxes, you aren’t alone.
In fact, it’s so common now you read about it in the news.
Moving to another state may indeed save you money on your income taxes. This is especially true if you move from a high state income tax state, such as California, to one with no state income tax, such as Florida.
Even so, it isn’t as simple as it seems. You need to examine the tax impacts of these moves carefully.
You can’t just look at the tax rates. Instead, you have to look at your entire tax situation.
One state may have higher tax rates but offer more deductions and credits.
Those deductions and credits could result in you paying less income tax than moving to another state with a 1% lower income tax rate.
You need to look through your entire tax situation to see if the move is as beneficial as you think it will be.
Don’t Forget About Part-Year Resident Tax Returns
When you leave a state, you still likely have to pay taxes on money earned in your previous state when you lived there.
You often do this through a part-year resident return.
If your new state has an income tax you’ll likely have to file a part-year resident return in the new state, too.
Remember the Big Picture
Moving solely to save money on state income taxes might leave you disappointed.
Deciding to uproot your life and move to a new area is a serious decision.
You’ll be leaving your friends, family, community, and support group behind.
You’ll have to find new doctors, get kids established in new schools, find a new house, and more.
These take both a financial and an emotional toll. While saving a few percent on state income taxes each year may be worth the cost, other expenses could increase.
You might not pay as high state income taxes, but property taxes might be much higher.
Your old state may not have had an ad valorem car tax but your new lower income tax state might.
Sales tax rates could be different, too. While sales taxes are based on consumption, they can impact your budget.
Before you move, make sure you look at the whole picture. This includes financial impacts, family impacts, and emotional impacts.
Only then can you decide if moving to another state to save money on income taxes is worth it for your situation.