Individual Income Taxes
The individual income tax (or personal income tax) is a tax levied on the wages, salaries, dividends, interest, and other income a person earns throughout the year. The tax is generally imposed by the state in which the income is earned. However, some states have reciprocity agreements with one or more other states that allow income earned in another state to be taxed in the earner’s state of residence.
In 2021, 41 states and the District of Columbia levied a broad-based individual income tax. New Hampshire taxes only interest and dividends. Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming do not tax individual income of any kind. (Tennessee previously taxed bond interest and stock dividends but the tax was repealed effective in tax year 2021.)
- How much revenue do state and local governments raise from individual income taxes?
- Which states rely on individual income taxes the most?
- How much do individual income tax rates differ across states?
- What income is taxed?
- How do states tax capital gains and losses?
- How do states tax income earned in other jurisdictions?
- Further reading
State and local governments collected a combined $426 billion in revenue from individual income taxes in 2018, or 13 percent of general revenue. That was a smaller share than state and local governments collected from property taxes but roughly equal to what they collected from general sales taxes.
Individual income taxes are a major source of revenue for states, but they provide relatively little revenue for local governments. State governments collected $390 billion (19 percent of state general revenue) from individual income taxes in 2018, while local governments collected $36 billion (2 percent of local government general revenue).
In part, the share of local government revenue from individual income taxes is small because of state rules: only 12 states authorized local governments to impose their own individual income tax or payroll tax in 2018. In those 12 states, local individual income tax revenue as a percentage of general revenue ranged from less than 0.1 percent in Oregon to 17 percent in Maryland.
Localities in Indiana, Iowa, Maryland, and New York levy an individual income tax that piggybacks on the state income tax. That is, local taxpayers in these states file their local tax on their state tax return and use state deductions and exemptions when paying the local tax. Michigan localities also levy an individual income tax but use local forms and calculations.
Meanwhile, localities in Alabama, Kansas, Kentucky, Missouri, Ohio, Oregon, and Pennsylvania levy an earnings or payroll tax. These taxes are separate from the state income tax. Earnings and payroll taxes are typically calculated as a percentage of wages, withheld by the employer (though paid by the employee) and paid by individuals who work in the taxing locality, even if the person lives in another city or state without the tax. Localities in Kansas only tax interest and dividends (not wages).
Maryland collected 23 percent of its state and local general revenue from individual income taxes in 2018, the most of any state. The next highest shares that year were in Connecticut (22 percent), New York (21 percent), and Massachusetts (20 percent).
Among the 41 states with a broad-based individual income tax, North Dakota relied the least on the tax as a share of state and local general revenue (4 percent) in 2018. In total, seven of the 41 states with a broad-based taxes collected less than 10 percent of state and local general revenue from individual income taxes that year. In 2018, New Hampshire and Tennessee both taxed a very narrow base of income, and as a result their taxes provided less than 1 percent of state and local general revenue that year. (Tennessee's narrow income tax was eliminated in tax year 2021.)
In 2021, the top state individual income tax rates range from 2.9 percent in North Dakota to 13.3 percent in California (including the state’s 1 percent surcharge on taxable income over $1 million). The next highest top individual income tax rates are in Hawaii (11 percent) and New Jersey (10.75 percent). In total, nine states and the District of Columbia have top individual income tax rates at or above 8 percent.
In contrast, 13 states with a broad-based individual income tax have a top individual income tax rate of 5 percent or lower. Indiana, North Dakota, and Pennsylvania have a top tax rate below 4 percent.
Nine states with a broad-based tax use a single (flat) tax rate on all income. Hawaii has the most tax brackets with 12.
Further, unlike the federal individual income tax, many states that use multiple brackets have top tax rates starting at relatively low levels of taxable income. Thus, most state individual income taxes are fairly flat. For example, the threshold for the top tax rate in Alabama (5 percent) begins at only $3,001 of taxable income. Not counting the nine states with flat tax rates, the threshold for the top income tax rate is below $40,000 in taxable income in 11 states. (These taxable income amounts are for single filers. Some states have different brackets with higher totals for married couples. See this table of state income tax rates for more information.)
But some states have more progressive rate schedules. For example, California's top rate (13.3 percent) applies to taxable income over $1 million. The District of Columbia (8.95 percent), New Jersey (10.75 percent), and New York (8.82 percent), also have top tax rates that begin at $1 million in taxable income.
States generally follow the federal definition of taxable income. Thirty-two states and the District of Columbia use federal adjusted gross income (AGI) as the starting point for their state income tax. Federal AGI is a taxpayer’s gross income after "above-the-line" adjustments, such as deductions for individual retirement account contributions and student loan interest. Another five states use their own definitions of income as a starting point for their tax, but these state definitions rely heavily on federal tax rules and ultimately roughly mirror federal AGI. Colorado, Idaho, North Dakota, and South Carolina go one step further and use federal taxable income as their starting point. Federal taxable income is AGI plus the federal calculations for the standard or itemized deductions (e.g., mortgage interest and charitable contributions) and any personal exemptions (which the federal government currently sets at $0).
However, state income tax rules diverge from the federal laws in a few ways. For example, unlike the federal government, states often tax municipal bond interest from securities issued outside that state. Many states also allow a full or partial exemption for pension income that is otherwise taxable on the federal return. And in most states with a broad-based income tax, filers who itemize their federal tax deductions and claim deductions for state and local taxes may not deduct state income taxes on their state income tax itemized deductions.
Because states often use federal rules in their own tax systems, the Tax Cuts and Job Acts (TCJA) forced many states to consider changes to their own systems. This was especially true for states that used the federal standard deduction and personal exemption on their state income tax calculation (before the TCJA nearly doubled the former and eliminated the latter). The TCJA also created a new federal deduction for pass-through business income (income earned by sole proprietors, partnerships, and certain corporations). However, because the deduction is for federal taxable income, this only affected states that use federal taxable income as the start of their tax calculations.
A similar dynamic (but with smaller fiscal ramifications) occurred when Congress expanded the federal earned income tax credit and child tax credit in response to the COVID-19 pandemic. Because of connections between the federal and state tax codes, states that conform with these policies will also see increases in their state-level EITC.
Five states and the District of Columbia treat capital gains and losses the same as federal law treats them: they tax all realized capital gains, allow a deduction of up to $3,000 for net capital losses, and permit taxpayers to carry over unused capital losses to subsequent years.
Other states offer a range exclusion and deductions not in federal law. New Hampshire fully exempts capital gains, whereas Arkansas excludes at least 50 percent of all capital gain income and up to 100 percent of capital gains over $10 million. Arizona exempts 25 percent of long-term capital gains, and New Mexico exempts 50 percent or up to $1,000 of federal taxable gains (whichever is greater). Pennsylvania and Alabama only allow losses to be deducted in the year that they are incurred, while New Jersey does not allow losses to be deducted from ordinary income (see our table on state treatment of capital gains for more detail).
However, unlike the federal government which provides a preferential rate, most states tax capital gains at the same rate as ordinary income. Connecticut, Hawaii, Massachusetts, and Oregon levy special tax rates on capital gain income.
State income taxes are generally imposed by the state in which the income is earned. Some states, however, have entered into reciprocity agreements with other states that allow outside income to be taxed in the state of residence. For example, Maryland’s reciprocity agreement with the District of Columbia allows Maryland to tax income earned in the District by a Maryland resident—and vice versa. Typically, these are states with major employers close to the border and large commuter flows in both directions. Most states also allow taxpayers to deduct income taxes paid to other states from what is owed to their home state.
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