Federal income tax gets most of the attention, but for many Americans, state income tax is the second-largest item on their tax bill. State tax systems vary dramatically: nine states have no income tax at all, while others impose top rates above 13%. Understanding how your state’s system works — and how it interacts with your federal return — can make a significant difference in tax planning.
Three Types of State Income Tax Systems
1. No State Income Tax
Nine states impose no individual income tax on wages or salaries:
| State | Notes |
|---|---|
| Alaska | No income or sales tax |
| Florida | No income tax; has sales tax |
| Nevada | No income tax; has sales tax |
| New Hampshire | No wage income tax (investment income taxed, but being phased out) |
| South Dakota | No income tax; has sales tax |
| Tennessee | No wage income tax (investment income tax eliminated in 2021) |
| Texas | No income tax; has sales tax and higher property taxes |
| Washington | No income tax; has sales tax (capital gains tax enacted in 2022 for high earners) |
| Wyoming | No income tax; has sales tax |
Living in a no-income-tax state does not mean zero state-level tax burden. States without income taxes often rely more heavily on sales taxes and property taxes to fund government services. Texas, for example, has some of the highest property tax rates in the nation.
2. Flat Tax States
Several states apply a single rate to all taxable income, regardless of amount:
| State | Flat Rate (approx.) |
|---|---|
| Arizona | 2.5% |
| Colorado | 4.4% |
| Georgia | 5.49% |
| Idaho | 5.8% |
| Illinois | 4.95% |
| Indiana | 3.05% |
| Kentucky | 4.0% |
| Michigan | 4.25% |
| Mississippi | 4.7% |
| North Carolina | 4.75% |
| Pennsylvania | 3.07% |
| Utah | 4.65% |
Flat tax states are simpler to understand: your marginal rate equals your effective rate on state income (before credits or deductions). However, flat taxes are generally considered less progressive than tiered systems since lower earners pay the same percentage as higher earners.
3. Progressive (Graduated) Tax States
Most states use a tiered bracket system similar to federal income tax, where higher income is taxed at higher rates. The number of brackets and the rates vary widely:
| State | Top Rate | Notes |
|---|---|---|
| California | 13.3% | Highest top rate in the nation; 1% mental health surcharge at $1M+ |
| Hawaii | 11.0% | 12 brackets |
| New Jersey | 10.75% | On income over $1 million |
| Oregon | 9.9% | On income over $125,000 (single) |
| Minnesota | 9.85% | On income over $183,340 (single) |
| Vermont | 8.75% | On income over $213,150 (single) |
| New York | 10.9% | On income over $25 million |
| Iowa | 3.8% – 5.7% | Reducing to flat rate by 2026 |
How State Tax Interacts With Federal
State income tax and federal income tax are calculated largely independently, but they interact in one key area: the SALT deduction.
The SALT Deduction and Its $10,000 Cap
Taxpayers who itemize on their federal return can deduct state and local taxes (SALT) paid — including state income taxes and property taxes. However, the Tax Cuts and Jobs Act (TCJA) capped this deduction at $10,000 per return (or $5,000 for married filing separately) for tax years 2018 through 2025.
Before the cap, high-income residents of California, New York, New Jersey, and other high-tax states could deduct $30,000–$50,000 or more in state taxes, significantly reducing their federal taxable income. Now, the deduction is limited to $10,000 regardless of how much state tax was actually paid.
Example: A California filer with $250,000 in income might pay $18,000 in California income tax and $8,500 in property tax — $26,500 in SALT. Under current law, only $10,000 is deductible on the federal return. The other $16,500 provides no federal benefit.
The SALT cap is set to expire after 2025. Whether Congress extends it, eliminates it, or raises it will significantly affect after-federal-tax costs of living in high-state-tax locations.
Federal Deductibility of State Taxes for Businesses
While the $10,000 cap applies to individual filers, businesses can generally deduct state income taxes (and other state taxes) as a business expense without the $10,000 limitation. This has led many small business owners to pursue Pass-Through Entity Tax (PTET) elections — a workaround where the entity (S corporation or partnership) pays state income tax on behalf of owners, deducting it at the business level.
Over 30 states now have PTET regimes. Business owners in high-tax states should consult a tax professional about whether this workaround is available and beneficial.
Residency, Domicile, and Part-Year Taxes
State income tax is based on residency and source income:
- Full-year residents: Taxed on all income, regardless of where earned
- Part-year residents: Taxed on income earned while a resident, plus income sourced from that state
- Nonresidents: Taxed on income sourced from that state (wages earned there, business income, rental income from property there)
Establishing and changing domicile matters when you move. If you move from New York to Florida mid-year, you must be able to prove you abandoned New York domicile. New York aggressively audits high-income individuals who claim to have moved — examining where you spend your time, where your close contacts and social ties are, and where you vote and bank.
General rule of thumb: spend fewer than 183 days in the old state after establishing domicile in the new state, and change as many administrative connections (bank accounts, voter registration, driver’s license) as possible.
Comparing State Tax Burden
The marginal rate alone does not capture the full state tax picture. States differ in:
- What income is taxed: Some states exempt Social Security, pension income, or military pay
- Deductions and credits available: Standard deductions, personal exemptions, and credits vary by state
- Local income taxes: Some states allow cities to impose their own income tax (New York City adds up to 3.876%)
A complete picture of state tax burden requires looking at the effective rate after all credits and deductions — not just the headline marginal rate.
Tax Burden Comparison Example: $100,000 Income (Single Filer)
| State | Approximate State Income Tax | Effective State Rate |
|---|---|---|
| Texas | $0 | 0% |
| Pennsylvania | $3,070 | 3.07% |
| Colorado | $4,400 | 4.4% |
| North Carolina | $4,750 | 4.75% |
| Illinois | $4,950 | 4.95% |
| New York | ~$6,490 | ~6.5% |
| California | ~$6,009 | ~6.0% |
| Oregon | ~$7,200 | ~7.2% |
(Approximate; actual tax depends on deductions and filing specifics.)
Key Takeaways
- Nine states have no income tax: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, Wyoming.
- Flat tax states apply a single rate to all income; graduated states use progressive brackets up to 13.3% (California).
- State and local taxes are deductible on the federal return if you itemize, but the SALT cap limits the deduction to $10,000 through 2025.
- Business owners can potentially avoid the SALT cap via Pass-Through Entity Tax (PTET) elections available in most states.
- Moving to a no-income-tax state requires formally establishing domicile there — particularly important for high earners leaving New York, California, or New Jersey.
- Local income taxes (NYC, Philadelphia, etc.) add further burden beyond state-level rates.