February 25, 2020

Edited 11/17/20

State Income Tax Changes for 2020

Starting in the 2020 tax year, 9 states will change their state tax for all income received by their residents while 1 state is working towards becoming tax-free. These positive changes will affect those planning for retirement and retirees.  

For those planning, this will increase one’s take-home pay making it easier to contribute towards retirement savings. Also, retirees receiving limited income including Social Security will have more income after-taxes. Keep in mind, there are other ways to get tax deductions throughout the year to keep more of your money.

As a major source of revenue for state governments, states are adjusting tax rates to reflect the changes from the federal Tax Cuts and Jobs Act of 2017 (TCJA). TCJA is considered the most sweeping tax legislation since 1986 and will expire after 2025. This legislation resulted in a modest reduction in individual federal income tax brackets while greatly reducing tax rates on corporations to stimulate growth in the economy.

Everyone should be aware that tax levy and various deductions are dependent upon each state.

Currently, 43 states levy individual income taxes while seven do not at all. Out of 41 states that tax wage and salary income, only two states exclusively tax dividends and interest income. 

Income Tax Changes By State for 2020

According to the Tax Foundation, most states increased their standard deduction while others decreased individual taxes. If you live in these states, pay close attention to the recently enacted income tax changes.

Arizona

The standard deduction doubled to closely mirror the new federal standard deduction. Now, the number of income brackets decreased from five to four brackets while the income within those brackets also reduced. In addition, the dependent exemption is replaced with a generous child tax credit.

Arkansas

The individual income tax rate schedule for high earners has been consolidated from six brackets into four. The top marginal rate dropped from 6.9% to 6.6%.

Massachusetts

The single-rate individual income tax decreased from 5.05% to 5.0% to meet revenue targets outlined in a tax trigger from 2002.

Michigan

The personal exemption has increased from $4,400 to $4,750 as part of a four-year phase-in that began in the tax year 2018 . Also, it will start being indexed annually for inflation. By the tax year 2021, the personal exemption will reach $4,900.

Minnesota

The standard deduction has been doubled to closely mirror the new federal standard deduction and a new dependent exemption was created.

North Carolina

The standard deduction was increased by 7.5% for all filing statuses.

Ohio

The state’s seven individual income tax brackets were consolidated into five (with the first two brackets eliminated), and each of the remaining marginal rates was reduced by 4%. Indexing of the brackets was frozen at 2018 levels for tax years 2019 and 2020 but is set to resume in 2021.

Tennessee

The “Hall Tax,” which applies to investment income but not to wage income, is continuing to phase out with the rate dropping from 2% to 1% for 2020. Starting in 2021, Tennessee will be among the states with no individual income tax. This will make Tennessee a tax-friendly state to retire in.

Virginia

The increase in standard deduction will be applicable until 2025.

Wisconsin

Rates were reduced for the first two marginal brackets for individual taxpayers. The amount of the reduction for these brackets will be determined by sales tax revenue.

Takeaway from Changes to State Income Taxes

For 2020 tax year, these 10 states made favorable income tax changes to closely reflect TCJA. 

With these changes, planners can allocate more towards their savings and retirees have more after-tax income. Understanding how states tax on income can help you plan your tax liability on your own retirement income.