No one likes paying income tax — the tax levied on your taxable income by some states and the federal government. For most people working traditional jobs, personal income taxes are taken out of their paychecks. That can be painful since, due to income taxes, a large portion of your hard-earned money each time you get paid goes to the government instead of your bank account. But there is some good income tax news this year. Some states have lowered personal income taxes for 2023.
2023 State Income Tax Cuts
- There are many political and economic reasons why states are cutting personal income tax rates.
- Some policymakers are concerned about massive state tax cuts, given fears of recession and worry over the debt ceiling.
- There are also questions in some states about who (wealthy taxpayers or taxpayers with lower and middle incomes) will benefit from the various income tax cuts.
However, whatever the reason and potential impact, if you live in a state that has lowered its income tax rates, you might be able to keep a little more of your income to pay for necessities and splurges this year than you did last year. So, here’s what you need to know about states with lower income tax rates for 2023.
Arizona
Arizona lawmakers passed legislation last year that cuts the state’s income tax rate to a flat rate of 2.5%. The new Arizona flat personal income tax rate wasn’t expected until 2024. But the lower rate is effective now (in 2023) due to higher-than-expected tax revenues.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
- Arizona previously had income tax rates for single people making more than $159,000 a year that ranged from 2.59% to as high as 4.5%. Under the new flat tax rate plan, taxpayers pay 2.5%.
- Former Arizona governor Doug Ducey reportedly said the new flat tax would save families about $350 a year. However, some advocacy groups believe the flat tax will be a windfall for Arizonans with higher incomes, who now pay the same income tax rate as households with lower incomes.
What is a flat tax? A flat income tax essentially means that everyone pays the same tax rate on their taxable income.
Idaho
- Idaho used to have a top marginal income tax rate of 6%.
- But due to legislation, the state now has a flat tax rate of 5.8%.
In a statement about Idaho's historic tax cuts, Gov. Brad Little said, “The Idaho Legislature and I have worked together to achieve historic tax cuts for Idaho businesses and families, and we’re not done yet. We’ve turned back more tax relief per capita than any other state, with more property tax relief on the way.”
Indiana
Indiana passed legislation to cut its 3.23% income tax rate down to 2.9%. The move is part of a $1.1 billion tax package signed into law by Gov. Eric Holcomb.
- The Indiana personal income tax rate cut doesn’t all happen in one year, however. (For 2023, Indiana’s income tax rate will be 3.15%.)
- Future Indiana income tax cuts will depend on whether state revenue targets are met.
Iowa
Iowa will also move to a flat tax, but this will happen in phases. Iowa had nine income tax brackets before Gov. Kim Reynolds signed tax reform legislation that will reduce that number to four tax brackets with a maximum tax rate of 6.5% this year.
- Previously the maximum tax rate for Iowa was 8.53%.
- By 2026, there will just be a flat Iowa income tax rate of 3.9%.
Kentucky
Kentucky Gov. Andy Beshear signed a massive tax cut bill into law, backed by Republican lawmakers. The income tax cut for Kentuckians became effective Jan. 1, 2023. As a result, the state’s income tax rate went from 5% to 4.5%.
- The latest bill signed by Beshear will bring the income tax rate down another half percentage point (to 4%) beginning on Jan. 1, 2024.
Mississippi
Mississippi lawmakers want to repeal the state’s income tax. But for now, Mississippians have a flat income tax of 5% that doesn't apply to the first $10,000 of income.
Lawmakers have reportedly said that because of the tax cuts, a middle-income couple in Mississippi could save a little over $834 a year, while a single person with moderate taxable income could save over $400 a year.
- The income tax situation in Mississippi is notable in that the legislation technically repealed a lower 4% tax rate.
- In the next few years (by 2026), the 5% flat income tax rate is expected to fall to 4% through phased-down tax rate cuts.
Missouri
The top income tax rate (individual) in Missouri is down to 4.95% for 2023. (The previous individual income tax rate in Missouri was 5.3%.)
- Additionally, $1,000 is now exempt from individual income tax in the state. Previously, only $100 was exempt from Missouri’s individual income tax.
- The state has legislation in place to eventually reduce the top income tax rate to 4.5%, according to the Tax Foundation.
Nebraska
In Nebraska, individual income tax rates are down for 2023 from 6.84% last year to 6.64% this year. That income tax rate is expected to go down by small percentage points each year until a legislated rate is reached.
Note: State lawmakers have recently taken steps to slim down the tax cut for the state's top personal income tax rate. However, Nebraska is still proposing a little over $3 billion in income tax cuts over the next six years.
New York
In New York, middle-income earners have lower personal income tax rates this year than they did in 2022. Income tax rates for New Yorkers with lower incomes went from 5.85% down to 5.5%. Income tax rates for earners with slightly higher income went from 6.25% last year to 5% for 2023.
Those changes weren’t expected until 2025, but have become effective two years early.
North Carolina
North Carolinians have a new income tax rate of 4.75%, down from 4.99%. Over the last decade, North Carolina has engaged in major tax reforms. Those reforms mean that in the next few years (by 2027), the state will have a personal income tax rate of 3.99%.
However, Gov. Roy Cooper has recently proposed limiting the state's income tax cuts to people making less than $200,000 a year.
In March, Cooper tweeted: "We want to give the income tax breaks to working families, the people who need them. Not the wealthy and not the corporations. This budget recommends a personal income tax cut for families making less than $200,000 a year."
At the same time, state lawmakers have proposed an even lower income tax rate of 2.49% that, if approved, would be effective in 2026. But under Cooper's proposal, North Carolinians above the $200,000 income threshold would be taxed at the state's current income tax rate of 4.75%.
Federal Income Tax Rates 2023
Of course, state personal income tax rates are only a piece of the puzzle. You also will have to deal with federal income tax rates. Those rates (10%, 12%, 22%, 24%, 32%, 35%, and 37%) don't change, but the federal income tax brackets tied to those marginal tax rates are adjusted yearly for inflation.
For more information about federal income tax brackets and rates for 2023, see Kiplinger's guide on income tax brackets.
-
-
What’s in DeSantis’ $1.3 Billion Florida Tax Relief Bill?
DeSantis' $1.3 billion tax relief bill extends sales tax holidays and makes other tax cuts. Here's what you can buy tax-free — and when.
-
Letter from the Senior Digital Editor: Celebrating Pride
Kiplinger senior digital editor Alexandra Svokos writes at the start of Pride Month.
-
Republican Tax Package Expected After Debt Ceiling Deal
With a debt ceiling agreement in place, Republicans could soon propose a bill to address some key tax changes.
-
Minnesota Rebate Checks and Child Tax Credit in 2023
Minnesota rebate checks and a new state child tax credit are coming in 2023. Here's everything you should know.
-
Record-High HSA Limit Coming for 2024
The IRS says health savings account contribution amounts are going way up — almost 7% more — for 2024.
-
Having a Baby Could Soon Cost Less in These States
Having a baby is expensive, but these states are trying to make it less costly by eliminating the tax on diapers.
-
Controversial Capital Gains Tax Upheld in Washington
The state’s historic long term capital gains tax is projected to bring in $1 billion over the next two years.
-
Federal Electric Bike Tax Credit Would Offer up to $1,500
Lawmakers have proposed a bigger version of an e-bike bill that would provide a tax credit of up to $1,500 on some new electric bikes.
-
Biden Wants a Higher Child Tax Credit and So Do Some Republicans
President Biden wants to revive the higher child tax credit and monthly advance payments, while some Republican senators have their own ideas for the popular tax break.
-
IRS Confirms Tax Fate of California Middle Class Refunds
Millions of Californians worried about paying tax on middle class tax refunds have an answer along with other tax deadline relief.
