For residents in a handful of states, the new year came with something extra to celebrate: lower taxes.
Individual income tax rates have dropped in a few places, and one state began phasing out its inheritance tax, according to a new Tax Foundation report.
Here’s a look at the states whose lucky residents are now enjoying lower tax rates and the details behind these changes. Note that these changes will generally be in effect for the 2022 tax year, the one for which returns are due by April 2023.
Iowa is the state phasing out its inheritance tax, which will happen gradually through 2024, under a law established in June 2021.
As of Jan. 1, 2022, inheritance taxes have been reduced by 40% compared with their rates prior to the signing of that law, and they were retroactively lowered by 20% for 2021. They will be reduced a further 20% of the original rates at the start of 2023 and 2024, before disappearing completely in 2025.
The Tax Foundation calls Arizona’s tax law changes “among the nation’s most complex,” in part because overlapping changes are tied up in a court battle between education activists and the State Legislature.
For now, Arizona’s top income tax rate has been capped at 4.5% by Senate Bill 1828, circumventing a contested 3.5% tax on high earners that would have been on top of the 4.5% rate. Court review as well as this year’s election may change the situation, and could ultimately lead to the flat tax rate of 2.5% contained in Senate Bill 1828.
During a special legislative session in December 2021, Arkansas lawmakers lowered the state’s top individual income tax rate from 5.9% to 5.5% for 2022, part of a move that The Associated Press reported as “the largest tax cut in state history.”
Further reductions contained in the legislation will happen gradually. By 2025, the top income tax rate will decline to 4.9%.
Louisiana had multiple changes take effect on Jan. 1, thanks to the approval of Amendment No. 2 in the November 2021 election. These changes for the 2022 tax year and beyond include lowering individual income tax rates from 2%, 4% and 6% to new rates of 1.85%, 3.5% and 4.25%, respectively.
5. North Carolina
North Carolina’s latest budget, signed into law in November 2021, lowered the state’s flat income tax rate from 5.25% to 4.99% for 2022. That rate will continue to fall gradually, until it reaches 3.99% in 2027.
The state’s standard and child tax deductions were increased. Now the child tax deduction is worth $500 more than previously, while the standard deduction is worth:
- $25,500 for married couples filing jointly and for surviving spouses (up from $21,500)
- $19,125 for heads of household (up from $16,125)
- $12,750 for singles and for married individuals filing separately (up from $10,750)
In Oklahoma, all individual income tax rates decreased by 0.25%, bringing the top rate down to 4.75%, starting in 2022. That change is worth about $81 per year for the typical Oklahoman.
The state’s earned income tax credit was also made refundable, meaning it can increase a taxpayer’s refund or result in a taxpayer receiving a refund even if they don’t owe taxes.
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