🏛️ State Income Tax Comparison 2025

📖 Understanding State Income Taxes

Which States Have No Income Tax?

The following 9 states impose no state-level income tax on wages and salaries:

Note: New Hampshire previously taxed interest and dividend income at 5%, but this tax was fully repealed effective January 1, 2025. New Hampshire now has no state income tax of any kind. Tennessee's Hall Tax on investment income was phased out in 2021.

Flat vs. Progressive Tax Systems

Flat tax:

Progressive tax states (such as California at 1%–12.3%, New York at 4%–10.9%, and Hawaii at 1.4%–11%) use multiple tax brackets where higher portions of income are taxed at higher rates. The first dollars you earn are taxed at the lowest bracket rate, and only income above each threshold moves into the next bracket. Your effective tax rate (total tax ÷ total income) will always be lower than your top marginal bracket.

How State Taxes Interact with Federal Taxes

Since the Tax Cuts and Jobs Act of 2017 (TCJA), the state and local tax (SALT) deduction on your federal return is capped at $10,000 ($5,000 for married filing separately). This means:

• You can deduct up to $10,000 of combined state income taxes (or state sales taxes) and property taxes on your federal Schedule A.
• If your state tax bill exceeds ~$10,000, you cannot deduct the excess on your federal return, raising your overall tax cost in high-tax states.
• Residents of no-tax states (TX, FL, etc.) effectively benefit twice: no state tax bill, and no SALT cap limitation.
• State income tax payments are deductible in the year you pay them, not the year they are earned (withholding counts as paid throughout the year).

Additionally, state income tax is paid with after-tax dollars.

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Remote and hybrid work have made state tax residency rules critically important. Key principles:

• Residency-based states: Most states tax all income of their residents regardless of where the work is performed. If you live in California but work remotely for a New York company, you pay California tax.
• Source-based states (the "convenience of the employer" rule): New York, Connecticut, Delaware, Nebraska, and Pennsylvania have rules that tax non-residents on income earned while working remotely if the work could have been performed at the employer's in-state location.
• Physical presence: Most states require you to spend more than 183 days in the state to be considered a resident. Some states (California, New York) are notoriously aggressive in auditing remote workers.
• Multi-state filers: If you live in one state and work in another, you generally file a non-resident return in the work state and claim a credit on your resident return. But with the convenience rule, some workers end up double-taxed.

Bottom line: If you work remotely, your state tax liability depends on where you physically live (for most states) and where your employer is based (for convenience-rule states). Always consult a tax professional if you work across state lines.

States Taxing Retirement & Social Security

As of 2025, most states do not tax Social Security benefits. Only Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, Rhode Island, Utah, Vermont, and West Virginia still tax some or all Social Security income (many with income-based exemptions). States that fully tax pension/retirement income include California, Indiana, Minnesota, Nebraska, and Vermont (with some exemptions). States like Alabama, Illinois, Mississippi, New York, and Pennsylvania fully exempt retirement income.

Sales Tax vs. Income Tax Trade-off

States with no income tax (like Texas, Florida, Nevada, Washington) typically have higher sales taxes or other taxes to make up the revenue. Texas has an 8.2% average combined state-local sales tax rate; Washington's is 9.4%. Conversely, states with high income taxes (like Oregon, which has no sales tax) shift the burden differently. When comparing states, consider the full tax picture: income, sales, property, and excise taxes.