5 States Cutting Taxes for Next Year — and 2 Raising Them

Taxes are a hot topic in 2021. President Joe Biden has promised to raise taxes on the wealthy, and the Tax Foundation reports that 26 states and the District of Columbia have made noteworthy changes to their tax codes.

In some states — such as Arkansas and Iowa — corporate tax rates are falling. In Connecticut, Vermont and the District of Columbia, estate tax rules are changing.

However, most people focus on personal income taxes. In two states, income taxes have risen in 2021. But in five others, rates have fallen.

It’s important to note that these changes all go into effect this year, meaning they will impact the state tax returns that residents file in 2022.

Following are the seven states where personal income taxes have either risen or fallen in 2021.

Massachusetts — falling

Residents of Massachusetts have more reason to give to good causes in 2021. The state has a new income tax deduction for charitable contributions.

Even better, the deduction is available to Massachusetts taxpayers regardless of whether they itemize their deductions or claim the standard deduction, the Tax Foundation reports.

Around 20 years ago, a law was passed stating that the state’s personal income tax must fall to 5% before the charitable deduction could be restored. That level was finally reached in 2020, when the rate fell from 5.05% to 5%.

You don’t have to live in Massachusetts to take advantage of this kind of tax deduction this year, though: The federal government recently made a similar deduction more generous, as we detail in “2 Charitable Tax Breaks Have Been Extended for 2021.”

Arkansas — falling

A 2019 Arkansas law not only reduced the state’s corporate tax rates, but it also set gradual personal income tax decreases into motion. In 2021, the number of tax brackets is being reduced by one, from four to three.

So, the top marginal rate for those earning more than $79,300 is now 5.9% instead of 6.6%.

Connecticut — falling

Older investors who live in Connecticut have reason to cheer. The state is phasing in an increase in its income tax exemption for pension and annuity income.

The exemption is increasing to 42% for 2021. That is up from 28% last year.

Tennessee — falling

Perhaps 2021’s most significant tax decrease will occur in Tennessee. Beginning this year, the state will no longer levy any personal income tax.

What formerly was known as the state’s “Hall Tax” — an income tax that impacted interest and dividend income — has been slowly phasing out since 2016. The tax is history as of 2021, meaning Tennessee is now one of eight states that do not levy any taxes on any type of income.

Those states are:

• Alaska
• Florida
• Nevada
• South Dakota
• Tennessee
• Texas
• Washington
• Wyoming

Iowa — falling

In addition to other tax changes taking place this year in Iowa, a tax change that relates to pass-through business income will continue to be phased in during 2021. According to the Tax Foundation:

“Iowa conformed to the federal pass-through business income deduction that was enacted as part of the Tax Cuts and Jobs Act (TCJA). For 2019 and 2020, Iowa offered a state deduction equal to 25 percent of the federal deduction. That amount has phased up to 50 percent for 2021 and is set to increase to 75 percent for 2022 and beyond.”

Arizona — rising

Arizona famously went “blue” last November, narrowly voting for President Joe Biden instead of his predecessor, President Donald J. Trump. But lost in that drama was the fact that voters in Arizona opted to raise their taxes.

Arizona voters approved Proposition 208, which created an income tax “surcharge” intended to help fund education. The upshot: A new, fifth income tax bracket has been added to the state tax code. It has a rate of 8%, which is a hefty jump from the former top rate of 4.5%.

New Mexico — rising

In addition to Arizona, another of the “four corners” states also is adding a new tax bracket. In New Mexico, the top rate is now 5.9%. This new, fifth tax bracket has a rate that is 1% higher than the old top rate of 4.9%. New Mexico failed to meet its revenue growth target in 2020, which triggered the hike.

If you live in either of the other two “four corners” states — Colorado and Utah — you can exhale. Your state income taxes will not be increasing.