Forty-three states will begin 2026 with notable tax changes, and eight of them are lowering individual income tax rates, the Tax Foundation reported on December 18, 2025. Its annual roundup shows Ohio becoming a flat-tax state and North Carolina's rate dropping below 4%. For high-income households, the cuts shift the after-tax value of living in these states, while New York moves in the other direction by keeping its temporary surtaxes on top earners in place.
What changed
These are the individual income tax rate reductions taking effect January 1, 2026:
| State | 2025 top rate | 2026 top rate | Cut |
|---|---|---|---|
| Nebraska | 5.20% | 4.55% | 0.65 pt |
| Kentucky | 4.00% | 3.50% | 0.50 pt |
| Mississippi | 4.40% | 4.00% | 0.40 pt |
| Ohio | 3.125% | 2.75% | 0.375 pt |
| North Carolina | 4.25% | 3.99% | 0.26 pt |
| Montana | 5.90% | 5.65% | 0.25 pt |
| Oklahoma | 4.75% | 4.50% | 0.25 pt |
| Indiana | 3.00% | 2.95% | 0.05 pt |
Ohio's move to a single 2.75% rate makes it one of 15 states with a flat income tax, although the state is also tightening eligibility for some credits and exemptions. Oklahoma is consolidating six brackets into three as it lowers its top rate. Montana doubles its earned income tax credit to 20% of the federal credit.
New York's budget extends the temporary surtaxes on high earners and expands its child tax credit to $1,000 per child under age four and $500 per child aged four to 16 for 2026 and 2027. On the business side, North Carolina, Nebraska and Pennsylvania trim corporate rates, with Pennsylvania going from 7.99% to 7.49%.
Who is affected
The rate cuts reach every resident taxpayer in these states, but the dollar value grows with income. Owners of pass-through businesses who pay tax on business profits through their individual returns benefit the same way. CBS News noted that Nebraska faces a projected $432 million budget shortfall, prompting calls to pause further cuts, a reminder that scheduled reductions are not guaranteed to continue.
The after-tax math
Example: a household with $500,000 of state taxable income. The figures apply each state's rate change to the full amount for simplicity. In graduated-rate states such as Nebraska and Montana, only income in the top bracket gets the full cut, so actual savings are somewhat lower.
- Nebraska: about $3,250 less state tax
- Kentucky: about $2,500
- Mississippi: about $2,000
- Ohio: about $1,875
- North Carolina: about $1,300
- Indiana: about $250
The federal side interacts with these savings. The state and local tax deduction cap rises from $10,000 to $40,000 under the federal law, CBS reported, although the higher cap phases down for incomes above set levels. Lower state tax means a smaller SALT deduction for households that can use it, which shaves part of the benefit.
Moves to discuss with your advisor
Households with flexibility over when income is recognized, such as bonus timing, business sales or large capital gains, sometimes compare taking income in 2025 versus 2026 when their state rate is falling. People considering a move often look beyond headline rates to property taxes, sales taxes and how the state treats retirement income. Anyone changing residency may want advice on the documentation states require, because a departing high earner is a common audit focus.
What to watch
Several of these cuts are triggered by revenue conditions, so budget pressures could slow future reductions. Legislatures convening in January 2026 will decide whether to accelerate, pause or reverse scheduled changes, and New York's surtax extension keeps its top-earner burden in place for now.
Sources
- First reported State Tax Changes Taking Effect January 1, 2026 — Tax Foundation
- States cutting individual income taxes in 2026 — CBS News
After TAX is an independent publication. Articles are general information, not tax, legal or investment advice. Consult a licensed professional about your situation.
