State Income Tax 2026: 9 No-Tax States and the Top Marginal Rates

Tax Planning Published May 13, 2026 Updated May 24, 2026

Nine US states have no individual income tax on wages in 2026. New Hampshire completed the phase-out of its interest and dividends tax effective January 1, 2025, bringing the no-income-tax count from 8 to 9. Among the 41 states (plus DC) that do tax income, top marginal rates range from California's 13.3% (on income over $1 million) down to North Dakota's 2.5%. This post compares all 51 jurisdictions, surfaces the trade-off between income tax and other state taxes, and looks at how each state treats retirement income.

The Nine No-Income-Tax States in 2026

• Alaska
• Florida
• Nevada
• New Hampshire (interest and dividends tax fully repealed January 1, 2025)
• South Dakota
• Tennessee
• Texas (state income tax is constitutionally prohibited)
• Washington (no wage tax, but a separate 7% tax on long-term capital gains above ~$278,000)
• Wyoming

Tennessee phased out its Hall Tax (interest and dividends) in 2021. New Hampshire's last 1% rate applied to tax year 2024, then went to zero on January 1, 2025. Both are now full no-income-tax states for wages, interest, and dividends.

Top Marginal Rates by State (2026)

Eight states made 2026 rate cuts: Indiana (3.0% to 2.95%), Kentucky (4.0% to 3.5%), Mississippi (4.4% to 4.0%), Montana (top 5.9% to 5.65%), Nebraska (top 5.20% to 4.55%), North Carolina (4.25% to 3.99%), Ohio (collapsed to flat 2.75% above $26,050), and Oklahoma (top 4.75% to 4.5% with bracket consolidation).

Flat-Tax vs Progressive States

Fifteen states use a flat individual income tax rate in 2026 (no brackets, same rate from dollar one): Arizona, Colorado, Georgia, Idaho, Illinois, Indiana, Iowa, Kentucky, Louisiana, Michigan, Mississippi (above the $10k exempt amount), North Carolina, Pennsylvania, Utah. Ohio joined this group in 2026 via HB96, which collapsed its previously progressive schedule to 2.75% above a $26,050 zero-rate floor.

The remaining 26 states (plus DC) use progressive brackets. Some, like Hawaii with 12 brackets, are quite granular; others like North Dakota use just 3.

State Tax Reciprocity Agreements

If you live in one state and work in another, you may owe tax in both unless they have a reciprocity agreement. The main agreements as of 2026:

• DC reciprocates with Maryland and Virginia (residents of MD/VA who work in DC pay only home-state tax).
• Pennsylvania reciprocates with Indiana, Maryland, New Jersey, Ohio, Virginia, West Virginia.
• Illinois reciprocates with Iowa, Kentucky, Michigan, Wisconsin.
• Several other Midwest and Mid-Atlantic agreements exist.

Where no agreement exists (notably New York with New Jersey, Connecticut, and Pennsylvania), workers typically pay tax in the work state and claim a credit for taxes paid in their home state. New York's "convenience of the employer" rule famously taxes remote employees of NY-based companies on days worked outside NY, which has been the subject of litigation.

Where Retirees Actually Save the Most

Picking a retirement state by income tax alone misses several layers of cost. The realistic ranking accounts for:

• Effective property tax rate (median): Hawaii 0.28%, Alabama 0.40%, Colorado 0.51%, vs Illinois 2.08%, New Jersey 2.13%, Connecticut 1.97%.
• Combined sales tax (state + average local): Tennessee 9.55%, Louisiana 9.55%, Arkansas 9.46% (high); Alaska 1.82%, Hawaii 4.50%, Wisconsin 5.43% (low).
• State tax on Social Security benefits: 9 states tax some portion (Colorado, Connecticut, Minnesota, Montana, New Mexico, Rhode Island, Utah, Vermont, West Virginia, with various exclusions); 41 states + DC do not.
• State tax on pensions and 401(k) distributions: Pennsylvania fully exempts both. Mississippi exempts retirement income for residents 59½+. Illinois exempts qualified retirement income entirely.

By the combined measure, Tennessee, Florida, Wyoming, and South Dakota frequently top retiree-friendly rankings: no income tax + moderate property tax + no estate or inheritance tax. Pennsylvania ranks well despite a flat 3.07% income tax because all retirement income is exempt at the state level. Washington is competitive for wage retirees but its capital gains tax can hit affluent retirees realizing investment gains.

The Trade-Off: Low Income Tax Often Means High Property or Sales Tax

State governments need revenue. The states with no income tax tend to make up the gap with one or two of: high property tax, high sales tax, or extraction royalties (oil/gas/coal in Texas, Alaska, Wyoming). For a typical middle-class household with a home and modest investment income:

• Texas: 0% income, but property tax effective rate ~1.81% (sixth highest in the US).
• Florida: 0% income, ~0.83% property tax, 6% state sales tax (~7% combined with local).
• Tennessee: 0% income, ~0.67% property tax, 9.55% combined sales tax (highest in the US).
• Washington: 0% wage income, ~0.87% property tax, 8.86% combined sales tax, plus 7% capital gains tax above ~$278k.
• Alaska, Wyoming, South Dakota: very low total state-and-local tax burden by most measures, supported by extraction royalties or low public spending.

State Tax on Retirement Income

Two questions matter most:

1. Does the state tax Social Security?
2. Does the state tax pensions and IRA/401(k) distributions?

Federal taxation of Social Security uses three tiers (0%, 50%, 85% of benefits taxable) based on combined income; states layer their own treatment on top. Most states either fully exempt Social Security or follow federal taxable amounts. The nine states that tax some portion (Colorado, Connecticut, Minnesota, Montana, New Mexico, Rhode Island, Utah, Vermont, West Virginia) typically have age- or income-based exemptions that protect lower-income retirees.

Pension and 401(k) treatment varies sharply. Pennsylvania, Illinois, Mississippi, and Hawaii (for employer-funded pensions) are unusually generous. New York exempts the first $20,000 of retirement income for residents 59½+ ($40,000 MFJ). California taxes all retirement income at standard brackets.

Domicile vs Residency: The Audit Risk

States that lose high-income residents to no-tax states tend to audit. California, New York, and Illinois are the most aggressive. The legal concept is "domicile" (your true, fixed, permanent home) vs "residency" (where you happen to be physically). Establishing a new domicile requires more than buying a Florida house in February. Indicators auditors look at:

• Where you spend the majority of nights (the 183-day rule in many states)
• Where your driver's license, voter registration, and vehicle registration are
• Where your primary medical providers are
• Where your children attend school
• Where your "home of record" is for purposes like wills and trusts
• Where you maintain a permanent place of abode (PPA), especially in NY

The biggest audit triggers are: still owning the old-state house, still working remotely for an old-state employer, and not actually changing your behavior. A New York auditor presented with a New Yorker who bought a Naples condo, maintained a Manhattan apartment, kept her NY medical team, and continued working remotely for a NY firm will assess NY tax on most of her income.

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