How state income tax works
Each state with an income tax writes its own rules on top of the federal income tax, but most borrow the federal starting point, typically federal adjusted gross income or taxable income, and then add or subtract items. Some states apply one flat rate; others use graduated brackets that, like federal tax brackets, charge higher rates only on income inside each band. Standard deductions, personal exemptions and credits vary widely, and many states set their own amounts rather than following the federal ones.
Treatment of particular kinds of income varies even more. Most states tax capital gains like other income, without the lower federal long-term rates. Interest on US Treasury securities is exempt from state and local income tax. Most states exempt interest on their own municipal bonds but tax bonds issued by other states. Retirement income is where states differ most: many exempt some or all pension and IRA income for older residents, most do not tax Social Security, and a few tax part of it, usually with income limits.
In some places a local layer sits on top. Certain cities, counties and school districts charge their own income tax, sometimes only on wages and sometimes on the same base as the state.
Residency decides who can tax you
A state taxes its residents on all of their income, wherever it is earned. Residency usually starts with domicile, the place you treat as your permanent home, but many states also treat you as a statutory resident if you keep a home there and spend more than a set number of days in the state. Nonresidents owe tax only on income sourced to the state, such as wages for work performed there, rent from property there or business income earned there.
That can put two states on the same dollar. The usual fix is a credit: your home state gives you credit for tax paid to the state where you earned the income. Some neighboring states go further with reciprocity agreements, so a commuter’s wages are taxed only where they live. Moving mid-year makes you a part-year resident of both states, each taxing its share of the year.
Federal law protects retirees who move. Under 4 U.S.C. §114, no state may tax a nonresident’s retirement income from 401(k)s, IRAs, 403(b)s, 457 plans, pensions and similar plans. Rent or business income you still earn in your former state stays taxable there. A move can change more than tax: nine states also apply community property rules to married couples’ income and assets.
States without an income tax in 2026
Nine states levy no broad personal income tax on wages in 2026: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming. New Hampshire’s tax on interest and dividends was repealed for tax periods beginning in 2025, and Tennessee’s Hall tax on investment income ended in 2021.
Washington needs two caveats. It already taxes long-term capital gains above an annual deduction at 7%, with 9.9% on gains above $1 million since 2025. And under a 2026 law, a new 9.9% tax on individual income above $1 million begins January 1, 2028, with the first returns due in 2029.
No income tax does not mean low tax. These states rely more on sales, excise and property taxes, and some levy an estate tax. Moving for a lower tax bill is a form of geoarbitrage, but the saving depends on your whole budget, not the headline rate.
How state tax interacts with your federal return
State and local income taxes are deductible on your federal return, but only if you itemize. The SALT deduction covers state and local income taxes, or general sales taxes instead, plus property taxes, up to $40,400 for 2026, or half that if married filing separately, and the cap shrinks for MAGI above $505,000. You deduct the tax in the year you pay it, so a state estimated tax payment made in December counts for that year.
Because the joint standard deduction is $32,200 in 2026, many households get only part of their state tax back through itemizing, and many get none. The real cost of state income tax is therefore often close to its face value.
State tax also matters in retirement decisions. A Roth conversion done while living in a state with no income tax avoids state tax on the converted amount, and a survivor moving to single filing faces narrower state brackets as well as federal ones, part of the widow’s penalty.
Illustrative numbers
What a flat 5% state tax really costs a married couple in 2026
- State tax
- State income tax for the year, after state deductions and credits
- Federal deduction it adds
- Your federal deduction with the state tax minus your deduction without it, within the SALT cap
- Federal marginal rate
- The federal bracket that applies to your last dollar of taxable income
If you would take the standard deduction either way, the federal offset is zero and the net cost equals the state tax.
Wages, married filing jointly$200,000
State income tax: an illustrative flat 5% on $190,000 of state taxable income$9,500
Federal itemized deductions with it: $17,500 of SALT (incl. $8,000 property tax) + $18,000 mortgage interest$35,500
Federal deduction without it: the standard deduction beats $26,000 of itemized$32,200
Extra federal tax without the state tax: $3,300 × 22%$726
Net cost of the state income tax$8,774
The federal deduction offsets only $726 of the $9,500, because most of the itemized total merely replaces the standard deduction. Moving to a state with no income tax would save this couple about $8,774 a year, before any change in property tax, sales tax or the cost of living.
At a glance
What a state can tax, depending on your connection to it
| Your status | What the state can tax | How double tax is avoided |
|---|---|---|
| Resident (domicile or statutory residency) | All income, wherever earned | Credit for tax paid to the state where income was earned |
| Part-year resident | All income while a resident, plus in-state income for the rest of the year | Income is split by residency dates |
| Nonresident | Only income sourced to the state, such as wages for work there or rent from property there | Your home state usually gives a credit |
| Nonresident retiree | Not income from 401(k)s, IRAs, pensions or similar plans (4 U.S.C. §114); other in-state income still counts | Only your state of residence taxes plan income |
| Commuter between states with a reciprocity agreement | Wages are taxed only by the home state | The agreement between the two states |
Put it in your plan
State Income Tax in MoneyWhatIf
MoneyWhatIf prices state and local income tax every year alongside federal tax, from the plan’s state and locality. Supported-state and selected-local schedules use the 2025 published figures, carried forward with plan inflation. To test a move, turn on Plan to move to another state in Household settings and choose the year, or tie it to a life milestone: from that year the destination’s own state and local rules apply, including its retirement-income treatment. Moves happen at a year boundary, so part-year returns and multi-state wage sourcing are not fully represented.
Common questions
State Income Tax FAQs
Do I pay state income tax where I live or where I work?
Possibly both. The state where you work can tax wages earned there, and your home state taxes all of your income as a resident. Your home state then usually gives a credit for the tax paid to the work state, so you pay roughly the higher of the two rates. Some neighboring states have reciprocity agreements that let commuters pay only their home state.
How do I change my state residency for tax purposes?
By changing your domicile and being able to show it. States generally look at where you spend your time, where your home, family and belongings are, and where you hold a driver’s license, vote and register vehicles. File part-year returns in the move year and keep a log of days in each state, since a state you leave may challenge the move if you keep a home there.
Do states tax Social Security benefits?
Most do not. States with no income tax never do, and most states that tax income exempt Social Security entirely. A handful tax part of it, often with exemptions based on age or income, and generally no more than the federally taxable amount. Because the rules change often, check your state revenue department before planning around them.