State Income Tax Updates

As we enter the heart of tax season, your Farther team is here to guide you through the latest changes and ensure your tax strategy is optimized for success. 

Whether it is federal or state income taxes, understanding these updates is key to ensuring a successful financial plan. This article provides an overview of the most important updates across the country to help you navigate this season with confidence. 

States with No Income Tax

Here is a list of states where residents enjoy the benefit of no state income tax:

• Alaska
• Florida
• Nevada
• South Dakota
• Tennessee
• Texas
• Wyoming
• Washington*
• New Hampshire*

What’s the Catch for Washington and New Hampshire?

• Washington: While there is no traditional income tax, a Long-Term Capital Gains Tax applies. Any income beyond approximately $263,000 is taxed at 7%, gradually reducing to 4.41%. In addition, Seattle may introduce a local tax – we encourage you to stay tuned for updates on this front. 
• New Hampshire: There is no tax on W-2 earnings, but interest and dividends are taxed. However, the state is set to fully repeal the Interest and Dividends Tax in 2025.

States with No Tax on Traditional Retirement Income

For retirees, these states offer relief by exempting income from traditional retirement accounts:

• Alaska
• Florida
• Nevada
• South Dakota
• Tennessee
• Texas
• Wyoming
• Washington
• New Hampshire
• Illinois*
• Iowa*
• Mississippi*
• Pennsylvania*

Special Rules to Note:

• Illinois: Lump sum distributions from employer-sponsored stock (Net Unrealized Appreciation) may be eligible for tax exclusion.
• Iowa: Retirement income for individuals aged 55 and older may qualify for a tax exclusion.
• Mississippi: Early distributions (prior to age 59½) may be subject to taxation.
• Pennsylvania: Early distributions (prior to age 59½) may be subject to taxation.
• Early Withdrawals: While some retirement income may be exempt, early withdrawals from retirement accounts are generally taxable in most states. It is important to plan carefully.

States That Tax Social Security

While 41 states do not tax Social Security, here are the 9 states that do:

• Colorado
• Connecticut
• Minnesota
• Montana
• New Mexico
• Rhode Island
• Vermont
• West Virginia*

West Virginia: By 2026, West Virginia plans to fully eliminate its tax on Social Security, providing relief for many retirees.

Major Tax Updates for 2025

Several states are rolling out notable tax reforms in the coming year. 

Here is what to expect:

• Hawaii: Expanded tax brackets with rates ranging from 1.4% to 11%, alongside increased standard deductions.
• Indiana: The flat tax rate will decrease to 3%, with a target of 2.9% by 2027.
• Louisiana: Introducing a 3% flat rate for individuals and simplifying corporate taxes.
• North Carolina: The individual tax rate will be reduced to 4.5%, with future reductions planned.

Additional updates are expected in Iowa, Michigan, Mississippi, Missouri, Nebraska, Rhode Island, and South Carolina.

Retroactive Tax Changes to Watch

A few states have already enacted changes that may impact your 2024 filings:

• Alabama: Expanded tax-free overtime provisions for salaried, non-exempt employees.
• Arkansas: Retroactively reduced top individual and corporate tax rates to 3.9% and 4.3%, respectively.
• Kansas: Simplified tax brackets, reduced top rates, and increased standard deductions.

What Does This Mean for You?

Tax reforms can have a significant impact on your finances – whether through lowered rates, increased deductions, or new tax exemptions. Now is the ideal time to review your strategy and ensure you are positioned to maximize savings in the year ahead.

We will continue to bring you more in-depth breakdowns, strategic planning tips, and insights to help you navigate these changes and make the most of the new tax laws.