5 States Lowering Taxes This Year and 2 Raising Them

woman doing her taxes
Syda Productions / Shutterstock.com

Taxes are a hot topic in 2021. The new president has promised to raise taxes on the wealthy, and the Tax Foundation reports 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 will rise in 2021. But in five others, rates will fall.

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

Following are the seven states where personal income taxes will either rise or fall in 2021.

Massachusetts — falling

Springfield, Massachusetts
Sean Pavone / Shutterstock.com

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 event finally happened 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

Little Rock, Arkansas
Henryk Sadura / Shutterstock.com

A 2019 law not only reduced corporate tax rates in Arkansas, but 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

Black Rock Harbor in Bridgeport, Connecticut
Allan Wood Photography / Shutterstock.com

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

Nashville, Tennessee
jdross75 / Shutterstock.com

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 other states are:

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

Iowa — falling

Crop duster over a farm in Iowa
Gavin Baker Photography / Shutterstock.com

A tax change that relates to pass-through business income will continue to phase 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

You Touch Pix of EuToch / Shutterstock.com

Arizona famously went “blue” last November, narrowly voting for new President Joseph R. Biden Jr. 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

New Mexico Capitol
Zack Frank / Shutterstock.com

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, although as we noted smokers will be digging deeper to pay taxes in Colorado.

Disclosure: The information you read here is always objective. However, we sometimes receive compensation when you click links within our stories.

Read Next
How to Avoid Being Surprised by 7 Nasty Expenses
How to Avoid Being Surprised by 7 Nasty Expenses

Major expenses are difficult to predict, but there are ways to make sure you’re protected.

9 Hidden Ways to Get More Out of Amazon
9 Hidden Ways to Get More Out of Amazon

You don’t have to be a Prime member to take advantage of these little-known perks of shopping on Amazon.

6 Ways to Guarantee Yourself a Steady Retirement Income
6 Ways to Guarantee Yourself a Steady Retirement Income

Saving is just one part of the retirement equation. Do this now to guarantee income in your golden years.

Should You Hire a Service to Negotiate Your Cable and Other Bills?
Should You Hire a Service to Negotiate Your Cable and Other Bills?

Services like BillCutterz and BillFixers will negotiate your cable, internet, phone and other monthly bills in exchange for a share of the savings. I tried it: Here’s what happened.

Eat This Food If You Want to Avoid Alzheimer’s Disease
Eat This Food If You Want to Avoid Alzheimer’s Disease

One type of food associated with the Mediterranean diet offers especially large benefits.

View this page without ads

Help us produce more money-saving articles and videos by subscribing to a membership.

Get Started

Most Popular
7 Kirkland Signature Items to Avoid at Costco
7 Kirkland Signature Items to Avoid at Costco

Even if it seems you save a bundle buying Costco’s Kirkland Signature brand products, they may not be the bargain they appear to be.

How to Buy Gas At Costco Without a Membership
How to Buy Gas At Costco Without a Membership

The warehouse club often has some of the cheapest gas in town. Here’s how you can get it as a nonmember.

10 Things to Stop Buying If You Want a Clutter-Free Home
10 Things to Stop Buying If You Want a Clutter-Free Home

If you like to keep things simple, avoid these purchases.

If You Find This Thrift Shopping, Buy It
If You Find This Thrift Shopping, Buy It

Vacuums from this brand can last a half-century, if not longer — and they’re hot on the resale market.

A Simple Way to Silence Robocalls Today
A Simple Way to Silence Robocalls Today

A few steps can keep your phone from ringing when a spammer calls.

This Company Makes the Best Tires in America
This Company Makes the Best Tires in America

Driver satisfaction with tires is at an all-time high, but one brand stands out.

This Health Issue Can Hint at Dementia Years in Advance
This Health Issue Can Hint at Dementia Years in Advance

One type of pain is especially associated with cognitive decline.

Can I Switch to Spousal Social Security Benefits When My Ex Dies?
Can I Switch to Spousal Social Security Benefits When My Ex Dies?

Knowing when to claim can help you maximize benefits.

Medicare Will Not Cover These 6 Medical Costs
Medicare Will Not Cover These 6 Medical Costs

Don’t let these health care expenses catch you off guard in retirement.

8 Things You Should Always Buy on Amazon
8 Things You Should Always Buy on Amazon

The giant retailer shines when it comes to these things, from basics to hard-to-find specialty goods.

5 Ways to Get Amazon Prime for Free
5 Ways to Get Amazon Prime for Free

Hesitant to drop $119 a year on an Amazon Prime membership? Here’s how to get it for free.

5 Ways to Fill Your Pantry With Free Food
5 Ways to Fill Your Pantry With Free Food

Anyone can take advantage of these resources.

Beware This Hidden Ingredient in Rotisserie Chicken
Beware This Hidden Ingredient in Rotisserie Chicken

Something foul may lurk in those delicious, ready-to-eat birds.

If You Find This Thrift Shopping, Buy It
If You Find This Thrift Shopping, Buy It

This iconic dinnerware is prized for everyday use as well as reselling for profit.

3 Ways to Get Microsoft Office for Free
3 Ways to Get Microsoft Office for Free

With a little ingenuity, you can cut Office costs to zero.

6 Reasons You Should Stop Hiding Cash at Home
6 Reasons You Should Stop Hiding Cash at Home

Stashing money around the house is anything but harmless.

5 States With the Worst Health Care for Retirees
5 States With the Worst Health Care for Retirees

All of these states are located in the same region of the nation.

12 Deep Discounts Available on Amazon This Friday
12 Deep Discounts Available on Amazon This Friday

These items are steeply discounted — but the deals won’t last long.

5 Products You Should Never Buy Generic
5 Products You Should Never Buy Generic

Sometimes the brand-name version is clearly superior.

View More Articles

View this page without ads

Help us produce more money-saving articles and videos by subscribing to a membership.

Get Started

Add a Comment

Our Policy: We welcome relevant and respectful comments in order to foster healthy and informative discussions. All other comments may be removed. Comments with links are automatically held for moderation.