This year, nine states are implementing income tax rate cuts ranging from modest to substantial. The moves are part of an ongoing wave of state tax trimming that picked up steam during the pandemic, when federal aid left many state budgets flush with cash.
If you live in one of these states, your state income tax bill should get a little lighter.
- Georgia
- Indiana
- Kentucky
- Mississippi
- Montana
- Nebraska
- North Carolina
- Ohio
- Oklahoma
A lower tax rate doesn’t automatically translate to more money in your pocket unless you’re strategic about it.
What the rate changes look like
CBS reports that the cuts vary significantly by state. Kentucky is cutting its rate from 4% to 3.5%, while Nebraska drops from 5.2% to 4.55%. On the smaller end, Indiana’s rate edges down from 3% to 2.95%, and Georgia trims from 5.19% to 5.09%.
For context, if you’re a Kentucky resident earning $75,000 in taxable income, that half-percentage-point cut means roughly $375 more in your pocket annually. A Nebraska taxpayer at the same income level could see savings closer to $490. Not life-changing money, perhaps, but certainly worth capturing.
Ohio’s shift to a flat 2.75% rate for income over $26,050 (down from 3.13%) simplifies things considerably while putting more money back in taxpayers’ wallets. North Carolina’s move to 3.99% continues that state’s steady march toward one of the lowest flat rates in the country.
Consider Roth conversions
If you’re considering a Roth IRA conversion, 2026 might be the year to do it.
When you convert traditional IRA funds to a Roth, you pay income tax on the converted amount. Doing this in a lower-tax-rate year means you keep more of your retirement savings working for you. If you’ve been on the fence about converting, a rate cut might tip the scales.
Adjust your withholdings now
Most people don’t think about their W-4 until tax season, but that’s backwards. If you want to actually feel these tax cuts in your day-to-day finances, you’ll need to adjust your withholdings when the new rates kick in.
Otherwise, your employer continues withholding at the old rate, you overpay throughout the year, and you get a refund the following spring. Sure, refunds feel nice, but that’s essentially an interest-free loan to the government. You could have been earning returns on that money all year.
Contact your HR department or update your withholdings through your payroll system early this year. Many states also have their own withholding forms that may need to be updated separately from your federal W-4.
Should these cuts influence relocating?
If you’re already considering moving, lower state income taxes could factor into your decision. But here’s some perspective: moving solely for tax savings rarely makes financial sense unless the numbers are dramatic.
Someone earning $100,000 who moves from a state with a 5% income tax to one with no income tax saves $5,000 annually. That sounds great until you factor in moving costs, potential differences in property taxes, sales taxes, cost of living, and job market dynamics. States often make up for lower income taxes in other ways.
That said, if you’re already weighing a move between two of these nine states, the varying trajectories of their tax cuts could tip the balance. Mississippi, for instance, is on a path toward potentially eliminating its income tax entirely by continuing to cut rates annually until they reach zero. Other states are making more incremental adjustments.
Watch out for the federal deduction wrinkle
Here’s something that catches people off guard: If you itemize deductions on your federal return, your state and local tax deduction (commonly called SALT) could shrink along with your state tax bill. Less state tax paid means less to deduct on the federal return.
For most people, this won’t eliminate the benefit of lower state taxes, but it does mean your net savings might be smaller than a simple calculation suggests. This is especially relevant for higher earners in states with larger rate cuts, like Kentucky and Nebraska.
The SALT deduction is currently capped at $10,000, so if you’re already hitting that ceiling, the federal impact may be minimal. But it’s worth running the numbers with your specific situation in mind.
The bigger financial picture
These tax cuts keep money in your pocket rather than sending it to state coffers.
Proponents of the cuts argue this spurs economic growth and makes states more competitive. Groups like the nonpartisan Center on Budget and Policy Priorities have warned that reducing or eliminating state income taxes could stymie investments in public services such as education.
Nebraska offers a cautionary tale worth noting. According to the organization, the state went from a $1.9 billion budget surplus in 2023 to facing a $432 million shortfall, prompting some lawmakers to call on the state to pause the next phase of income tax cuts.
For individual taxpayers, the immediate question isn’t about state budget philosophy but about maximizing personal benefit from changes already locked in. Review your income timing flexibility, adjust your withholding, and consider whether this is the year for tax-advantaged moves, such as Roth conversions.
The states have done their part by lowering rates. Now it’s up to you to make sure those savings actually show up where they matter most: your bank account.
Before making plans for your tax savings, and if you have over $100,000 in savings, consider getting advice from a pro to make the most of your money. SmartAsset offers a free service that matches you to a vetted, fiduciary advisor in less than 5 minutes.
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