Happy New Year — and for residents in eight lucky states, it’s literally happier at tax time! As of January 1, 2026, these states rolled out reductions to their individual income tax rates, putting more money back in paychecks right away (via adjusted withholding) or bigger refunds when filing in 2027.
This comes amid massive federal buzz from the One Big Beautiful Bill (no tax on tips/overtime, senior deductions, etc.), making 2026 one of the most taxpayer-friendly years in recent memory. But not every state joined the party — including Illinois, which holds steady at its flat 4.95% rate with no cuts on the horizon.
If you’re wondering “Which states cut income taxes in 2026?” or “How do these changes affect me?”, here’s the full scoop, backed by the Tax Foundation’s latest analysis and reports from CBS News, USA Today, and others.
The 8 States Cutting Individual Income Taxes in 2026
These reductions — mostly flat-rate drops or top-bracket trims — stem from multi-year plans passed when revenues were strong (thanks to post-pandemic aid and growth). Here’s the breakdown:
• Indiana — Flat rate drops from 3% to 2.95% (further to 2.9% in 2027, with potential for 2.55% later if revenue goals hit). A tiny-sounding change, but it adds up for higher earners.
• Kentucky — Flat rate slashed from 4% to 3.5% — one of the biggest percentage drops this year, triggered by revenue thresholds.
• Mississippi — Flat rate falls from 4.4% to 4% (final step in a multi-year phase-down; new laws aim for 3% by 2030 and eventual elimination).
• Montana — Top marginal rate reduced from 5.9% to 5.65% (plus expanded low-bracket access; drops to 5.4% in 2027).
• Nebraska — Top rate cut from 5.2% to 4.55% (aggressive 0.65-point drop; ongoing phase to 3.99% by 2027, though some lawmakers debate pausing due to budget shortfalls).
• North Carolina — Flat rate decreases from 4.25% to 3.99% (final leg of a long-term reduction plan).
• Ohio — Transitions to a flat 2.75% rate on income above $26,050 (no tax below that; simplified from prior brackets/top rate of ~3.125%).
• Oklahoma — Top rate slides from 4.75% to 4.5%, with brackets consolidated from six to three for easier filing.
(Note: Some early reports mentioned nine states including Georgia, but the Tax Foundation clarified no individual rate cut was triggered for Georgia in 2026.)
Real-World Savings Examples
These aren’t just numbers — they translate to real cash:
• A single filer in Kentucky earning $80,000 could save ~$400 annually (on the 0.5% drop).
• In Nebraska, someone at the top bracket ($150,000+) might pocket $975+ extra per year from the 0.65-point cut.
• Ohio’s flat tax simplification + lower rate could mean hundreds saved for middle-income families, plus less hassle during filing.
Combined with federal perks (like no tax on overtime/tips starting this season), residents in these states could see thousands more in take-home pay or refunds overall.
[Insert visual here: A simple table or infographic comparing old vs. new rates for the 8 states — great for shares!]
Why These Cuts Matter — And the Debate
Pros (Pro-Growth View):
States like these are racing to attract talent, businesses, and remote workers from high-tax areas (hello, California, New York, Illinois!). Lower rates = more disposable income → boosted spending, investment, and economic growth. Flat taxes simplify filing and reduce “bracket creep.”
Cons (Critics’ View):
Groups like the Center on Budget and Policy Priorities warn of risks: Nebraska’s shift from surplus to shortfall highlights how cuts could strain funding for schools, roads, and services if revenues dip long-term. Some call for pauses to protect essentials.
It’s classic tax competition — and it’s working for growth-oriented states.
What About Illinois? (Why Chicagoans Are Watching Closely)
Living in Chicago? Illinois stuck with its flat 4.95% individual income tax rate for 2026 — no reduction, no phase-down. (It’s been steady since 2017, with withholding tables unchanged per the IL Dept. of Revenue.)
This makes Illinois less competitive compared to neighbors like Indiana (now ~2.95%) or even Kentucky. If you’re a high earner or business owner, the gap could push thoughts of relocation — especially with federal changes amplifying state differences.
Question for readers: Would a state income tax cut make you consider moving? Or do you value Illinois services enough to stay?
Bottom Line: Tax Relief Is Here — But It’s Uneven
2026 is delivering real wins for millions in these eight states, compounding federal breaks for even bigger refunds. If you’re in one, check your paystub withholding now and plan ahead for filing season (starts Jan 26!).
If not — like most in Illinois — these changes highlight the power of state policy. Tax competition is real, and it’s reshaping where people live and work.
What’s your state? Drop a comment below with your location and thoughts — did your state cut taxes, or are you eyeing a move? Subscribe for daily tax tips (including TTOTD on X), more breakdowns, and updates on federal/state changes. Let’s make 2026 your most tax-savvy year yet! 🚀
#2026TaxCuts #StateIncomeTax #TaxRelief #TaxPlanning #IllinoisTaxes
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