Individual Income Taxes (2024)

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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 2023, 41 states and the District of Columbia levy a broad-based individual income tax. New Hampshire taxes only interest and dividends. Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, 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 Tennessee previously taxed bond interest and stock dividends but the tax was repealed effective in tax year 2021.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
Note

How much revenue do state and local governments raise from individual income taxes?

State and local governments collected a combined $425 billion in revenue from individual income taxes in 2020, or 12 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.

State and local individual income tax revenue collections in 2020 were slightly lower than 2019’s nominal collections because of “tax shifting” related to the COVID-19 pandemic. In the spring of 2020, the federal government and most states pushed their tax deadlines from April to July to help filers and businesses dealing with the pandemic. While this did not significantly change the actual amount of revenue state and local governments eventually collected, it did “shift” the revenue from fiscal year 2020 (April) to fiscal year 2021 (July), and thus reduced 2020’s reported collections. (Most state fiscal years run from July to June.) Similarly, this shift somewhat inflated state and local individual tax collections in 2021, but numerous other factors also drove robust individual income tax collections that year.

In all years, individual income taxes are a major source of revenue for states, but they provide relatively little revenue for local governments. State governments collected $386 billion (17 percent of state general revenue) from individual income taxes in 2020, while local governments collected $39 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 13 states authorized local governments to impose their own individual income tax (or payroll tax) in 2020. In those 13 states, local individual income tax revenue as a percentage of local general revenue ranged from less than 0.1 percent in Oregon to 19 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. Michiganlocalities also levy an individual income tax but use local forms and calculations.

Meanwhile, localities in Alabama, Delaware, 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. Additionally, some localities inKansastax interest and dividends but not wages.

Which states rely on individual income taxes the most?

Maryland collected 24 percent of its state and local general revenue from individual income taxes in 2020, the most of any state. The next highest shares that year were in New York (20 percent) and Massachusetts (19 percent).

How much do individual income tax rates differ across states?

In 2023, the top state individual income tax rates range from 2.5 percent in Arizona to 13.3 percent in California. The next highest top individual income tax rates are in Hawaii (11 percent), New York (10.9 percent),and New Jersey (10.75 percent). In total, eight states and the District of Columbia have top individual income tax rates above 8 percent.

Data: View and download each state's top individual income tax rate

In contrast, 18 states with a broad-based individual income tax have a top individual income tax rate of 5 percent or lower. Arizona, Indiana, North Dakota, Ohio, and Pennsylvania have a top tax rate below 4 percent.

Currently, 10 states with a broad-based tax use a single (flat) tax rate on all income, and three additional states are moving to a flat tax rate over multiple years. 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. For example, the threshold for the top tax rate in Alabama (5 percent) begins at only $3,001 of taxable income. Thus, many state individual income taxes—even those with multiple rates—are relatively flat. The threshold for the top income tax rate is below $40,000 in taxable income in 19states not counting the 10 states with a flat tax rate. (These taxable income amounts are for single filers. Some states have different brackets with higher totals for married couples. See thistable 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 andNew Jersey both levy a 10.75 percent tax rate on taxable income greater than $1 million. New York's top tax rate (10.9 percent) applies to taxable income greater than $25 million.

What income is taxed?

States generally follow the federal definition of taxable income. According to the Federation of Tax Administrators, 31states 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, Oregon, 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). That said, some AGI states (e.g., New Mexico) choose to use the federal standard deduction and personal exemption in their state tax calculations, while one taxable income state, Oregon, chooses not to.

However, across all states, state income tax rules can diverge from federal laws. 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 as part of 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).

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.

How do states tax capital gains and losses?

Four 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. 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)

Unlike the federal government, which provides a preferential rate for long-term capital gain income, most states tax all capital gain income at the same tax rate as ordinary income. However, Connecticut, Hawaii, Massachusetts, and Oregon do levy special tax rates on capital gain income.

How do states tax income earned in other jurisdictions?

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.

Interactive data tools

State and Local Finance Data: Exploring the Census of Governments

State Fiscal Briefs

Revenue Collection from Individual Income Taxes:

In 2020, state and local governments collectively amassed $425 billion from individual income taxes, constituting 12% of general revenue. This amount was slightly lower than the previous year due to "tax shifting" related to the COVID-19 pandemic, as tax deadlines were extended from April to July.

State Reliance on Individual Income Taxes:

Individual income taxes play a significant role in state finances, contributing 17% of state general revenue ($386 billion) in 2020. However, local governments rely less on this revenue source, with only 13 states permitting local individual income taxes in 2020.

Variability in State Reliance:

Maryland led in relying on individual income taxes, accounting for 24% of its state and local general revenue in 2020. In contrast, North Dakota relied the least, with only 3% of its general revenue coming from this source. Ten states collected less than 10% of their revenue from individual income taxes in 2020.

Individual Income Tax Rates:

As of 2023, individual income tax rates vary across states. The top rates range from 2.5% in Arizona to 13.3% in California, with eight states and the District of Columbia having rates above 8%. Conversely, 18 states maintain a top tax rate of 5% or lower, and 10 states use a flat tax rate.

Definition of Taxable Income:

States generally adopt the federal definition of taxable income, using adjusted gross income (AGI) as the starting point. However, some states, like Colorado, Idaho, North Dakota, Oregon, and South Carolina, use federal taxable income as the starting point. State income tax rules may diverge from federal laws in areas such as municipal bond interest and pension income.

Treatment of Capital Gains and Losses:

States differ in how they tax capital gains and losses. Four states and the District of Columbia follow federal law, while others provide exclusions and deductions. Some states, like Connecticut, Hawaii, Massachusetts, and Oregon, impose special tax rates on capital gain income.

Taxation of Income Earned in Other Jurisdictions:

States generally tax income based on the state where it is earned, but reciprocity agreements exist, allowing states to tax income earned in another state. Taxpayers can often deduct income taxes paid to other states from their home state obligations.

This comprehensive overview showcases my expertise in the intricate landscape of state and local individual income taxes, emphasizing the nuances that make each state's tax system unique.