Key State Tax Changes to Know for 2026

Federal tax policy often dominates headlines, especially since President Donald Trump and the GOP enacted a sweeping tax overhaul last year. But many people don't realize that state tax laws tend to have a more immediate impact on household budgets.

For 2026, dozens of states enacted changes to income taxes, sales taxes, property taxes, and senior and Veteran tax relief programs. These may impact everything from take-home pay and retirement income to property taxes and the cost of everyday purchases.

Here are some significant 2026 state tax changes and what they may mean for you as a resident and taxpayer.

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State Income Tax

States cutting income taxes for 2026

Several states reduced individual income tax rates or simplified their tax structures for 2026. The moves are part of a recent trend toward lower and flatter income taxes.

Because state income taxes are often the largest tax burden for many households, these changes can materially affect take-home pay.

Here are some notable state income tax changes effective this year:

• Georgia reduced its flat income tax rate to 5.09%, continuing a legislated phase-down enacted in prior years.
• Indiana lowered its flat income tax rate from 3.0% to 2.95%, with another reduction scheduled for 2027.
• Iowa completed its transition to a flat 3.9% income tax, replacing its graduated income tax.
• Kentucky reduced its flat individual income tax rate from 4.0% to 3.5%, part of a long-term statutory plan tied to revenue benchmarks.
• Mississippi reduced its flat income tax rate to 4.0%, completing a multi-year reduction.
• Montana and Mississippi lowered their top marginal income tax rates, and North Carolina's flat income tax rate fell again, to a level significantly lower than earlier in the decade.
• Ohio implemented a flat 2.75% income tax on most non-business income exceeding a specific threshold, while exempting income below that level.
• Oklahoma reduced its top marginal rate and consolidated its income tax brackets, and South Carolina reduced its top marginal income tax rate for 2026.

Key State Income Tax Changes for 2026

Sales Taxes

2026 grocery tax and sales tax changes

In 2026, several states changed sales and grocery taxes that will impact household budgets.

Illinois and Arkansas are eliminating their state-level grocery taxes: 1 % in Illinois and 0.125 % in Arkansas. So, families will no longer pay state sales tax on most food purchases.

Note: Local governments can and often do continue to tax groceries, meaning many households will still face grocery taxes, depending on where they live. But these state-level grocery tax changes can provide some relief for those who spend a large share of their income on essentials.

At the same time, Maine is expanding its 5.5% sales tax to cover digital goods and services, including streaming subscriptions, online media, and some digital software. A Deloitte Media Trends report finds that an average U.S. household subscribes to four streaming services. With that in mind, some estimates put the average additional monthly cost to a Maine household at nearly $3.60.

These changes illustrate a broader trend. States are refining sales tax rules to reduce the burden on necessities while capturing revenue from growing sectors, like digital commerce.

Speaking of commerce, a new "green fee" In Hawaii became effective as of January 1, 2026. As Kiplinger reported, the fee is designed to help protect Hawai'i's natural ecosystem from the impacts of climate change.

The first-of-its-kind levy will raise the state’s transient accommodations tax (TAT) for nightly lodging. Initially, the Hawaii green fee was supposed to apply to hotel stays, cruise ship cabins, and short-term rentals. But a federal court has blocked the portion applicable to cruise ships in an ongoing legal battle.

Retirement Income

Taxes on Social Security and retirement income in 2026

In 2026, several states continued easing the tax burden on retirees.

For example, Arizona changed how Veteran income affects property and income tax exemptions. Under a new law, the state is excluding most veteran-related income sources from eligibility calculations.

Michigan continued implementation of exemptions for retirement income, reducing or eliminating state income taxes on many pensions and withdrawals from retirement accounts. The exact impact depends on a retiree’s age and birth year, but for many, the changes mean more money in their pockets.

West Virginia completed its multi-year phase-out of state income taxes on Social Security benefits, fully exempting them starting in 2026.

While some states still tax certain retirement income, many offer age- or income-based exemptions. Retirees should review their state-specific retirement tax rules to understand how the 2026 changes affect their personal finances and tax burdens.

Winnings and Losses

Gambling and sports betting taxes in 2026

As legalized sports betting and online gaming continue to grow, some states and the federal government are refining how these activities are taxed.

Higher taxes can make betting more expensive for consumers, but they also generate significant revenue for public services like education, infrastructure, and health programs.

For instance, New Jersey implemented higher, more uniform tax rates on online casino games and sports betting revenue as part of reforms enacted in 2025. The changes take effect for the 2026 tax year (returns typically filed in 2027).

Iowa has also changed how some gambling winnings are taxed for individuals.

• Beginning January 1, 2026, Iowa requires state income tax withholding on sports betting winnings whenever federal withholding is required, formally classifying those winnings as Iowa-source income.
• This affects when tax is collected, not how much is ultimately owed.
• The rate is a flat 3.8%.

It's worth noting that federal tax changes effective in 2026 will also affect gambling income. Under the 2025 Trump/GOP tax bill, new limits on the deductibility of gambling losses, effective for 2026, may increase taxable income for frequent bettors, even when winnings and losses roughly offset.

Because many states base their income tax systems on federal definitions and calculations, federal changes can be reflected in state tax bills unless a state explicitly decouples from federal law.

But stay tuned: As Kiplinger has reported, Trump is reportedly eyeing a reversal on the gambling loss limits set in his tax bill.

Homeowners

Property tax changes for 2026

Property taxes fund essential local services like schools, police, fire departments, and roads. But for homeowners, even small changes in rates or assessments can impact monthly budgets, home affordability, and long-term financial planning.

High property taxes can influence where people choose to live, while lower taxes can free up money for savings or spending, but may also reduce the quality and availability of some key local services.

Note: Some of the provisions mentioned phase in after 2026, and some estimated tax relief estimates cover multiple fiscal years, not just the 2026 bills.

Indiana is rolling out a major property tax overhaul designed to protect homeowners from rapid increases tied to rising property values. The new law, which takes effect this year, is expected to provide roughly $1.3 billion in relief over three years.

• Ohio passed a comprehensive reform affecting 2026 property tax bills, including caps on unvoted tax growth, fixes to assessment rules, and refunds for excess payments.
• Montana is implementing a new property tax rate structure for 2026 that lowers rates for primary residences and long-term rentals while adjusting how different property types are taxed.
• Pennsylvania expanded its Property Tax/Rent Rebate program for older adults and people with disabilities, increasing eligibility thresholds and benefit amounts.

Meanwhile, Mississippi increased its homestead exemption for eligible older adults so that qualified homeowners 65+ can exempt up to $12,500 of assessed home value from all ad valorem (property) taxes (up from $7,500 under prior law) beginning with the 2026 tax year.

In any state, homeowners should review assessment notices carefully and apply for any available exemptions or property tax appeals where eligible.

But these 2026 changes demonstrate how some states are trying to balance revenue needs with homeowner relief.

Trump Tax Bill

States 'decoupling' from the 2025 Trump tax law

When Congress changes federal tax law, states must decide whether to adopt those changes for state tax purposes — a process known as conformity.

When states decide not to conform (i.e., to decouple from federal rules), they don't automatically follow new federal provisions, like those in the 2025 Trump tax megabill. So, the decision on whether to decouple can change how much people or businesses owe in state taxes, even if their federal tax bill is lower. Decoupling can also affect budgets, planning, and the broader state economy.

The 2025 Trump tax law introduced several major federal provisions, including:

• New exclusions or deductions related to taxes on tips and overtime pay
• Expanded bonus depreciation and favorable treatment of domestic research and experimental expenses
• Other business-focused provisions are designed to accelerate deductions and reduce federal taxable income

If states automatically conformed to all of these changes, many would face significant revenue losses.

As a result, several states and the District of Columbia have decoupled from selected provisions to protect their tax bases. Several other states are reportedly considering decoupling from various provisions in the law Trump often calls the "big, beautiful bill."

For your state tax return, decoupling means:

• A deduction or exclusion allowed on the federal return might not be allowed on the state return
• You may need to add back certain federal deductions when calculating state taxable income

California, New York, Illinois, Maine, and the District of Columbia are some states that have rejected federal worker deductions for tips and overtime pay. In these states, your federal taxable income will be lower, but you'll likely have to "add back" those earnings on your state return and pay state tax on them.

• Colorado has taken a hybrid approach: The state allows the federal "No Tax on Tips" deduction to help service workers, but has decoupled from the "No Tax on Overtime" deduction to protect its state budget.
• Meanwhile, Michigan, Pennsylvania, Delaware, and Virginia have decoupled from the bill's "immediate expensing" rules.
• While the federal government now lets businesses deduct 100% of R&D and equipment costs instantly, these states require businesses to spread those deductions out over several years (amortization).

This is not an all-inclusive listing of state tax changes for 2026. Consult your state Department of Revenue or a qualified tax professional to understand how any tax changes apply to your specific situation.

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