State taxes aren’t a footnote — they’re part of the plan
At Income Lab, our job is to help financial planners guide their clients through life with confidence. And one of the easiest ways to lose trust (and throw off projections) is to get taxes wrong.
That’s why, at midnight on January 1, 2026, we updated all of our federal and state income tax models to reflect the most up-to-date tax rules, rates, and thresholds.
Why we sweat the details (especially at the state level)
Federal taxes get the headlines, but state taxes can be a huge factor for some, particularly in retirement planning, when you have more control over where you live and how you draw income.
Two households with the same retirement income can face meaningfully different tax bills depending on their state. Some states have no income tax. Others have special exclusions for retirement income like Social Security, pensions, and IRA or 401(k) withdrawals. Some states have steep top rates, while others keep rates low but lean more on sales or property taxes.
In other words, if the plan is “retire at 65,” the real question is “retire where, and with which income sources?”
A trend worth watching: the shift toward flat taxes
As we update state taxes every year, we notice trends as states compete with each other to attract businesses and retirees with friendlier tax regimes. One state tax trend that keeps picking up steam is the move from progressive systems (with graduated brackets that charge a higher rate at higher income levels) to single-rate (flat) income taxes. As of 2025, 14 states had (or were adopting) flat-rate personal income taxes, and the list has been growing.
Recent adopters and notable shifts include states like Arizona, Georgia, Idaho, Iowa, Louisiana, and Mississippi moving into (or completing a transition to) flat-tax structures in the last few years.
Even in states that don’t have a flat tax, we’ve observed a lowering of certain tax rates. For example, nine states implemented individual income tax rate reductions effective January 1, 2026 (including Georgia and Indiana), underscoring how quickly the landscape can change. Sometimes these rate changes are locked in. Other times they depend on states hitting certain revenue targets. So, this is a space to watch.
Even states like Hawaii, notorious for its high taxes, have recently begun state reforms that will lower some income tax burdens for many. In Hawaii, this comes through a shift in tax bracket thresholds, rather than rates. Hawaii’s thresholds are going up (which will lower taxes) in two-year blocks until 2030, when they will once again stay fixed without legislative action.
Another big shift: fewer states taxing Social Security
Another change we’re watching closely is that taxing Social Security at the state level is becoming less common. As of 2026, the large majority of states won’t tax Social Security benefits. With West Virginia’s shift in 2026, there are now only 6 states that tax Social Security benefits, and many of these still do offer some relief: Connecticut (excluded up to a limit), Minnesota (if AGI is above a threshold), Montana, New Mexico (if AGI is above a threshold), Rhode Island (if under age 67), Utah (some offsetting credit is available).
We’ve also seen a wave of recent moves in this direction, including recent changes by Colorado, Kansas, Missouri, and Nebraska to stop taxing Social Security benefits.
For retirement planning, that’s not trivia. Whether (and how) a state taxes Social Security can change the optimal withdrawal strategy, affect Roth conversion decisions, and materially alter after-tax spending power.
The long-term sleeper issue: “bracket creep” in the states
While many of these trends will help taxpayers, there’s a problem lurking in the tax code of many states: inflation. While most Federal tax bracket thresholds and values are adjusted every year to reflect inflation, many states leave tax values the same year after year. That means that even if your income is only rising with inflation, you can still wind up paying more tax over time if a tax system doesn’t keep up.
At the state level, inflation indexing practices vary. In places where brackets, deductions, or credits aren’t fully inflation-adjusted, taxpayers can get nudged into higher effective taxes over time without any explicit rate hike.
For retirement planning, that matters because your plan might span 20–40 years. That’s a long time for inflation to have an effect. For example, New York’s 6% bracket currently kicks in at $215,00 (single) / $323,200 (married filing jointly). But with 3% inflation, in ten years the buying power of these thresholds will have eroded significantly, to the equivalent of $160,000 / $240,000 in today’s dollars.
New York’s 6% Bracket
| Single | MFJ | |
| Today | $215,000 | $323,200 |
| 10 years from now | $160,000 | $240,000 |
| 20 years from now | $119,000 | $179,000 |
A “good” state tax picture today can quietly worsen if thresholds stay frozen while nominal income rises.
Of course, the Federal system isn’t immune from bracket creep: thresholds for 50% and 85% taxability of Social Security are not adjusted for inflation, and neither are the thresholds for the so-called “Obamacare” 3.8% net investment income tax.
What this means inside Income Lab
Our view is simple: all taxes – Federal, state, local, and even Medicare’s “Income Related Monthly Adjustment Amount” (IRMAA) – belong in the planning conversation, not as an afterthought and not as a spreadsheet add-on.
Surprisingly, many financial planning software systems still treat state income tax, Social Security taxability, and Medicare IRMAA as simplistic add-ons with a flat assumed tax rate.
Some software systems even ask you how much Social Security will be taxed (rather than figuring it out for you). In contrast, Income Lab includes all rates, thresholds, deductions, exemptions, and exclusions that typically affect workers and retirees, and properly models the effects of inflation and bracket creep.
That’s why we’ve updated our models through January 2026 and why we’ll keep doing the work to reflect changes promptly—so planners can
- compare strategies across locations,
- stress-test retirement income plans and Roth conversion projections under realistic tax rules,
- and incorporate state-level tax structure and indexing risks into long-term projections.
Because great advice starts with knowing what you’re up against.
Quick note: This post is for educational purposes and isn’t tax advice. Specific situations vary—especially across states.
