State Tax Changes for 2025: Key Reforms and What They Mean for Your Finances
It’s important to stay informed of state tax changes that can impact your budget.
As 2025 continues, taxpayers nationwide are bracing for significant tax reforms. You've probably heard about the changes at the federal level, with a second Trump administration in the White House and a Republican-led Congress having passed major new tax legislation that extends many of the 2017 Trump tax cuts in the TCJA. There are also significant shakeups at the IRS.
However, other changes involving state taxes are equally important.
Those state tax changes, ranging from income tax cuts to property tax and rent tax relief, as well as gas tax increases, vary considerably but will impact wallets nationwide — affecting everything from take-home pay to daily expenses.
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Let’s explore some key state changes you can expect this year so that you can plan and budget accordingly.
Note: While we highlight some tax changes here, this list is not all-inclusive. Check your state's Department of Revenue for comprehensive, location-specific information.
State income tax changes 2025
Nine states are cutting individual income tax rates, and some are shifting toward flat tax rates.
State income tax rates are significant because state and local taxes are often among people's highest taxes.
Those tax rates also impact economic growth, revenue generation for public services, and overall tax fairness. State taxes also influence a state's competitiveness in attracting businesses and residents.
Here's a breakdown of some notable changes for 2025:
- Iowa is transitioning from a graduated-rate tax with a top rate of 5.7% to a flat 3.8% tax.
- Louisiana has a new income tax. It is a single-rate individual income tax of 3%, along with a higher $12,500 standard deduction indexed to inflation.
- Indiana residents will see their flat tax rate decrease from 3.05% to 3%.
- Mississippi is reducing its flat individual income tax rate to 4.4%, down from 4.7% last year.
- Missouri is restructuring its brackets, adding a new sixth bracket with a 4.3% rate for filers earning between $16,500 and $33,500 individually or $25,000 to $50,000 jointly. Missouir is also the first state with an income tax to eliminate its capital gains tax for individuals.
- Nebraska, New Mexico, North Carolina, and West Virginia also implemented cuts to their individual income tax rates effective Jan. 1, 2025.
Meanwhile: New Hampshire repealed its tax on interest and dividends income. And Hawaii is widening its tax brackets to expose more income to lower marginal rates.
The following table compares the new 2025 tax rates with the prior 2024 rates for the mentioned states.
2025 State Income Tax Changes
State | 2024 Tax Rate | 2025 Tax Rate |
|---|---|---|
Indiana | 3.05% (flat) | 3% (flat) |
Iowa | Graduated, top rate 5.7% | Flat 3.8% |
Louisiana | Graduated, top rate 4.25% | Flat 3% |
Mississippi | 4.7% (flat) | 4.4% (flat) |
Missouri | Graduated, top rate 4.8% | Restructured, new 4.3% bracket. No more capital gains taxes for individuals as of Jan. 1, 2025. |
Nebraksa | 5.84% (top rate) | 5.2% (top rate) |
New Mexico | Five brackets, graduated, 1.7% - 5.9% | Six brackets and adjusted rates, 1.5%-5.9% |
North Carolina | 4.5% (flat) | 4.25% (flat) |
West Virginia | Graduated, top rate 5.12% | Graduated, top rate 4.92% |
Taxes on Social Security benefits
If your combined income is above certain limits at the federal level, you might have to pay taxes on up to 85% of your Social Security benefits. But the good news is that most states— plus D.C. — don’t tax Social Security income.
For states that do, here are notable changes for 2025.
West Virginia will phase out its state income tax on Social Security benefits over three years.
- In 2024, 35% of Social Security benefits will be exempt from state income tax.
- In 2025, 65% of Social Security income will be exempt
- In 2026, 100% of Social Security benefits will be exempt from state income tax.
This change applies to all Social Security recipients, regardless of income, affecting an estimated 50,000 West Virginians previously ineligible for the tax exemption.
Colorado is also making changes to its Social Security tax policy. Colorado already allows those 65 and older to subtract their Social Security benefits from state taxable income if their adjusted gross income (AGI) is below certain thresholds.
However, as of 2025, the state is expanding this exemption to those 55-64 with similar AGI limits. (For individual filers, the AGI limit is $75,000, while couples filing jointly can earn up to $95,000 and still qualify for the full deduction.)
For more information, see New Social Security Tax Reforms Change Benefits in Two States.
Meanwhile, Michigan will continue phasing out its retirement income tax this year. Michiganders born between 1946 and 1966 can deduct up to 75% of their retirement and pension income. The initiative is part of the broader Lowering MI Costs Plan to fully exempt most retirement income by 2026.
State sales tax changes
While some states adjusted their sales tax policies, the changes are a mixed bag.
- For example, as Kiplinger reported, Louisiana is restoring a 5% sales tax rate, up from the temporary 4.45% rate, while broadening its tax base to include digital goods
- Kansas exempts groceries from the state’s 2% sales tax
- Georgia localities can impose new sales taxes to offset property tax relief costs
- Nevada has ended its state sales tax on diapers
New property tax relief
Several states are implementing property tax measures in 2025 to provide relief to homeowners.
- Florida voters passed Amendment 5, which will adjust one of the two $25,000 homestead exemptions for annual inflation starting this year, 2025. For more information, see Kiplinger’s report: Floridians Vote to Increase Property Tax Break.
- Georgia voters approved Amendment 1, limiting cap assessment growth for homestead properties.
Also, as of January 1, 2025, the maximum homestead property exclusion in Minnesota increased by $7,600 to $38,000. It applies to homesteads valued at $95,000 or less; the exclusion is 40% of the property's market value.
Gas tax Increases 2025
As states deal with infrastructure needs and environmental concerns, several adjusted gas taxes.
- New Jersey increased its gas tax rate by 2.6 cents per gallon, effective January 1, 2025. Minnesota is raising its gas tax to 31.8 cents per gallon from 28.5 cents.
- California's Low Carbon Fuel Standard amendments could, by some estimates, raise gas prices by 35 cents per gallon in 2025. The state’s diesel prices are projected to potentially increase to 59 cents a gallon.
- On the other hand, drivers in New York and North Carolina will see a little relief in terms of lower gas tax rates. (Though, those in NYC have seen controversial congestion pricing that some see as a "ghost tax.")
While the federal EV tax credit could be at risk, Vermont and Wisconsin will begin taxing EV infrastructure. Also, Kentucky will adjust its EV charger tax rate annually based on the National Highway Construction Cost Index 2.0, with a maximum annual increase or decrease of 5%.
The fee in Kentucky for electric vehicles and plug-in hybrid EVs increases this year to $126, while for electric motorcycles, the fee rises to $63.
Rental tax
Beginning January 1, 2025, Arizona eliminated taxes on long-term residential rentals. The change is expected to save renters an estimated 1.5% to 3.5% on their monthly rent.
- The new policy applies to rentals lasting 30 days or more, impacting approximately 75 municipalities across the state.
- Landlords are required to pass these savings directly on to tenants.
- For more information, see Kiplinger's report on the Arizona Rental Tax Ban.
Effective January 1, 2025, Delaware imposes a short-term rental tax of 4.5% on the rent for any rental agreements signed after that date. That tax will be in addition to any local municipality taxes, and counties can levy an additional rental tax of up to 3%.
Note: In Delaware, a short-term rental is any residential property rented for 31 consecutive nights or less, excluding hotels and motels.
How 2025 tax changes can impact your wallet
These and other 2025 state tax changes reflect a complex balancing act between attracting residents and businesses, funding public services, and addressing long-term fiscal challenges.
For some, these shifts may result in lower income tax bills but potentially higher costs in other areas.
Please note that this article only highlights select state tax changes for the current year.
For example, Idaho recently passed a new Parental Choice Tax Credit, which provides eligible families a tax credit to offset private school tuition costs.
The state says this will allow parents greater flexibility in choosing their child's education environment while potentially reducing their tax burden. (The application officially opens in January 2026, but the law retroactively went into effect on January 1, 2025.)
Visit your state's Department of Revenue website for detailed information on tax policy and rules applicable to your location.
Consulting with a tax professional to understand how these and other tax changes might affect your situation can also be helpful.
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