As we enter 2025, taxpayers nationwide are bracing for significant tax reforms. You've probably heard about changes that will come at the federal level as a new administration enters the White House and Congress grapples with expiring TCJA tax cuts and the federal deficit. There could also be a major shakeup 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 and gas tax increases, vary considerably but will impact wallets nationwide — affecting everything from take-home pay to daily expenses.
Let’s explore some key state changes you’ll see this year so you can plan and budget.
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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% in 2024.
- 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.
- Nebraska, New Mexico, North Carolina, and West Virginia also implemented cuts to their individual income tax rates effective Jan. 1, 2025.
Meanwhile: New Hampshire has repealed its tax on interest and dividends income.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 depicts the new 2025 tax rates compared to the prior 2024 rates for the states mentioned.
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 |
| 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.)
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 in 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, starting January 1, 2025, the maximum homestead property exclusion in Minnesota will increase 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 will be facing new 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 will eliminate taxes on long-term residential rentals. This change will reportedly 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 will impose a short-term rental tax of 4.5% on the rent for any rental agreements signed after that date. This 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 could bring lower income tax bills but potentially higher costs in other areas.
Keep in mind that this article only highlights some state tax changes for 2025. Visit your state's Department of Revenue website for detailed information about tax policy and rules where you live.
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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