The tax arena may be in a constant state of flux, however, 2025 is proving to be a year of major upheavals. Alongside the widely anticipated sunset of the Tax Cuts and Jobs Act (TCJA), 39 states have implemented notable tax changes this year. This confluence of federal and state-level adjustments requires a thoughtful approach from tax advisors to make sure their practices remain compliant and that their clients receive the most effective guidance.
In the article, we’ll explore 2025’s key tax trends, the specific state-level tax changes, and how Harness can serve as a dependable guide through it all.
Table of Contents
- An overview of 2025’s tax changes
- Tax Changes by State in 2025
- Notable state tax changes from 2024
- How Harness can help
- FAQs
An overview of 2025’s tax changes
The wave of state tax reforms in 2025 will impact individuals, businesses, and consumers alike. Before we get into the state-specific details, let’s take a look at the broader tax trends in play.
Individual income tax changes
A definite trend in 2025 is the move toward lower individual income tax rates. Nine states—Indiana (IN), Iowa (IA), Louisiana (LA), Mississippi (MS), Missouri (MO), Nebraska (NE), New Mexico (NM), North Carolina (NC), and West Virginia (WV)—have all enacted legislation to cut their individual income tax rates. South Carolina (SC) has gone a step further by making previously temporary tax cuts permanent, providing greater certainty for its residents.
Beyond rate reductions, some states are undertaking more fundamental shifts in their individual income tax structures. Iowa and Louisiana are both in the process of transitioning to a flat tax system, a move that will simplify tax calculations, no doubt. New Hampshire (NH) has opted to repeal its tax on interest and dividends, potentially making it a more attractive state for retirees and investors.
Corporate and business tax changes
The corporate tax landscape is also experiencing significant adjustments. Several states are lowering their corporate income tax rates, including Nebraska (NE), North Carolina (NC), and Pennsylvania (PA). These reductions aimed at enhancing business competitiveness and attracting investment.
However, New Mexico (NM) is taking a different approach. It is raising its corporate income tax through the elimination of its lower tax bracket, a move that could impact smaller businesses in the state.
In an effort to incentivize investment, particularly in capital assets, Louisiana has adopted permanent full expensing for certain business investments. Nebraska is also encouraging capital investment by implementing a 60% first-year expensing provision.
Regarding operational aspects, Connecticut (CT) and Rhode Island (RI) have increased the net operating loss (NOL) carryforward periods, providing businesses with greater flexibility in managing losses.
The rules governing multi-state businesses are also evolving. Massachusetts (MA) and Montana (MT) have implemented single-sales factor apportionment for corporate income tax. This method of allocating income based solely on sales within the state will have major implications for businesses with operations in multiple jurisdictions.
Emerging areas of the economy are also being addressed. New Jersey (NJ) has created an artificial intelligence (AI) investment tax credit, signaling a focus on promoting innovation. On a broader business level, Ohio (OH) has raised the threshold for its Commercial Activity Tax (CAT), potentially exempting more small businesses from this levy.
Finally, Illinois (IL) is increasing its capital stock tax exemption, while Mississippi (MS) continues the phase-out of its capital stock tax, reflecting ongoing debates about the relevance and impact of this type of tax.
Sales and use tax changes
Changes in sales and use tax laws can directly affect consumers and businesses involved in retail. Louisiana (LA) is restoring a portion of its sales tax rate and broadening its sales tax base to include digital goods, highlighting the increasing importance of the digital economy.
In contrast, Kansas (KS) is providing tax relief by exempting groceries from sales tax, a move that will have a welcome impact on household budgets. In addition to this, Illinois (IL) is broadening its sales tax base to include certain tangible personal property (TPP) leases.
Tax changes by state in 2025
The following is a concise summary of more relevant tax changes in 2025, listed alphabetically by state:
Alabama: Broadened Transient Occupancy Tax.
Alaska: Eliminated remote seller transaction threshold ($100k sales nexus).
Arizona: Exempted long-term rentals from local TPTs; abolished city rental taxes.
California: Increased 911 surcharge; clarified cannabis tax; rising fuel costs (LCFS, refinery minimums).
Colorado: Capped non-school property tax growth; new rental car congestion fee.
Connecticut: Extended NOL carryforward; continued capital stock tax phase-down.
Delaware: Increased hazardous substance tax; new short-term rental tax; marijuana sales licenses expected (15% tax).
Georgia: Increased tangible personal property tax exemption; potential homestead assessment limit/local sales tax.
Hawaii: Modified income tax brackets/standard deduction; increased rental car surcharge.
Illinois: Increased franchise tax exemption (elimination on hold); broadened sales tax base; destination-based sourcing shift; capped retailers’ discount; property tax study.
Indiana: Reduced flat individual income tax rate.
Iowa: Flat individual income tax (3.8%); phased-out inheritance tax.
Kansas: Eliminated remaining state sales tax on groceries.
Louisiana: Single-rate individual income tax (3%); single-rate corporate income tax (5.5%).
Maine: Lessees pay sales tax on leased TPP (lessors exempt); refunds for 2023/24 TPP sales tax.
Massachusetts: Mandatory single sales factor apportionment (corporate income tax).
Michigan: Continued retirement income tax exemption phase-in (75%).
Minnesota: Increased motor fuel tax; raised homestead property exclusion; fuel tax adjustments; increased cigarette tax.
Mississippi: Further reduced flat individual income tax rate; continued corporate franchise tax phase-out.
Missouri: Slight decrease in top marginal individual income tax rate.
Montana: Single-receipts factor apportionment (corporate income tax).
Nebraska: Lowered top individual/corporate income tax rates (further reductions planned); consolidated income tax brackets; employee relocation tax credit/exemption; machinery/R&D deductions; remote employee withholding rule change; property tax relief.
Nevada: Sales tax exemption for diapers; increased unemployment insurance taxable wage base.
New Hampshire: Repealed tax on interest and dividends.
New Jersey: AI business tax credits; property tax cuts for seniors (StayNJ); increased gas tax.
New Mexico: Restructured/reduced individual income tax; single corporate income tax rate; EV/charging tax credits.
North Carolina: Lowered individual/corporate income tax rates (further reductions planned); increased standard deduction; sales tax exemption for high-value spirits.
Ohio: Increased Commercial Activity Tax (CAT) threshold.
Pennsylvania: Continued corporate income tax rate reduction; new NOL calculation formula (future).
Rhode Island: Extended NOL carryforward; new tax on ENDS products (flavored ENDS ban); single receipts factor option for banks; increased retirement income exemption.
South Carolina: Made temporary top individual income tax rate reduction permanent.
Tennessee: Hydrogen gas added to alternative fuels tax law.
Texas: Adjusted school district funding (property tax limits); TEA to post maximum levy rates.
Utah: Cannabinoid product tax; reduced workers’ compensation insurance premium tax.
Vermont: Increased Meals & Rooms Tax (short-term rentals); new EV infrastructure fee.
Washington: Expanded B&O tax exemption (childcare); new renewable energy personal property tax exemption.
West Virginia: Continued phased individual income tax rate reductions.
Wisconsin: Increased child/dependent care tax credit; new EV charging tax.
Wyoming: Property tax exemption (elderly homeowners/certain veterans); new residential property tax category (amendment).
While this list provides a snapshot of the key changes, tax advisors should delve deeper into the specific numbers, legislation, and implications within each state to fully understand the impact on their clients.
Notable state tax changes from 2024
Understanding the recent history of state tax changes provides valuable context for the reforms in 2025. Several notable changes occurred in 2024, signaling the ongoing trend of state-level tax adjustments.
There were also discussions and legislative actions regarding the treatment of pass-through entities and the implementation or modification of various tax credits and incentives. Changes to sales tax laws, particularly concerning the taxation of digital goods and services, were also a focus in many states during 2024.
Additionally, some states explored or enacted changes to their corporate income tax structures, reflecting a continuous effort to balance revenue needs with economic competitiveness.
Notable 2024 tax changes listed by state, alphabetically
Alabama: Expanded tax-free overtime provisions (consistent with FLSA) to include overtime wages of salaried non-exempt employees through June 30, 2025 (amendment effective May 17, 2024).
Arkansas: Retroactive to January 1, 2024: Top individual income tax rate reduced from 4.4% to 3.9% (SB 1, enacted June 19, 2024). Top corporate income tax rate lowered from 4.8% to 4.3% (SB 1, enacted June 19, 2024).
Georgia: Corporate income tax rate reduced from 5.75% to 5.39% for tax years beginning on or after January 1, 2024 (HB 1023, signed April 18, 2024).
Illinois: Cap on state-level net operating loss (NOL) deductions increased from $100,000 to $500,000 for tax years 2024-2027 (HB 4951, enacted June 7, 2024). Sports betting excise tax increased from 15% to graduated rates (20-40%), effective July 1, 2024.
Kansas: Retroactive to January 1, 2024 (SB 1, signed June 21, 2024): Number of individual income tax brackets reduced from three to two. Individual income tax rates lowered (top marginal rate reduced from 5.7% to 5.58%). Standard deduction, personal exemption, and dependent exemption increased.
Rhode Island: Cigarette tax increased from $4.25 to $4.50 per pack of 20, effective September 3, 2024 (HJR 7225, enacted June 2024).
These examples from 2024 underline the ongoing nature of state tax reform. The changes in 2025 are not isolated events but rather part of a broader pattern of states adapting their tax systems to changing economic conditions and policy priorities.
How Harness can help
Keeping up with federal tax changes and regulations can be hard enough without adding 50 individual variables to the tax equation. Harness helps tax advisors stay on top of this continually shifting terrain by plugging them into a vibrant tax services community. Accessing our network of peers allows you to connect with experienced professionals facing similar challenges.
With Harness, you gain more than just advanced software solutions. You become part of a supportive tax ecosystem where knowledge sharing and collective expertise are the norm. A community that helps its members interpret new regulations, understand their practical implications, and develop effective strategies, Harness is an invaluable asset for any tax practice.
FAQs
Common questions regarding the state taxes in 2025 include:
Beyond federal income tax, what other types of local tax might individual taxpayers be subject to, and how are these typically administered and collected separately from the Internal Revenue Service?
Individual taxpayers may be subject to various local taxes, such as property tax, sales tax, and sometimes local income tax. These taxes are typically administered and collected by state, county, or municipal tax departments, separate from the federal Internal Revenue Service. The rules, rates, and collection methods for these local taxes vary significantly depending on the jurisdiction.
What is the alternative minimum tax (AMT), and how does it function?
The alternative minimum tax (AMT) is a separate tax code designed to prevent certain individual taxpayers with high incomes from excessively reducing their tax liability through various deductions and credits.
It works by recalculating your taxable income and tax liability under a different set of rules, potentially disallowing certain itemized deductions. If the AMT liability is higher than your regular income tax liability, you must pay the AMT.
How is my taxable income calculated, and what role do itemized deductions or the standard deduction amount play in this calculation under current law?
Your taxable income is generally your adjusted gross income (AGI) less either your standard deduction amount or your itemized deductions. The AGI is your gross income minus certain above-the-line deductions.
You choose to either take the standard deduction amount, which is a fixed amount based on your filing status, or itemized deductions, which are specific expenses like certain medical expenses, state and local tax (up to a limit), and home mortgage interest.
For married couples filing jointly, how does the option of taking itemized deductions versus the standard deduction amount differ compared to single filers or single taxpayers?
Married couples filing jointly have a higher standard deduction amount than single filers or single taxpayers. When considering itemized deductions, married couples filing jointly combine their eligible expenses. The decision to itemize or take the standard deduction amount depends on whether their total allowable itemized deductions exceed the higher standard deduction amount available to them.
What happens to the standard deduction amount and itemized deductions after TCJA’s expiration, and how might this affect my taxable income in future taxable years beginning after the expiration?
The Tax Cuts and Jobs Act (TCJA) made significant changes to the standard deduction amount and certain itemized deductions. Upon the TCJA’s expiration, the standard deduction amount is scheduled to revert to pre-TCJA levels (adjusted for inflation), and certain limitations on itemized deductions may be removed. This could increase taxable income amounts for many individual taxpayers, depending on their specific circumstances and whether they itemize.
What are income tax credits, and how do they differ from itemized deductions in reducing my overall tax burden?
Income tax credits directly reduce the amount of income tax you owe, dollar for dollar. Itemized deductions, on the other hand, reduce your taxable income, which in turn lowers the amount of tax you owe. Therefore, a $100 income tax credit generally provides a greater reduction in your tax burden than a $100 itemized deduction.
How does the maximum child tax credit work, especially for married couples filing jointly, and what is the role of modified adjusted gross income in determining eligibility and the credit amount?
The maximum child tax credit provides a specific dollar amount per qualifying child. For married couples filing jointly, the income thresholds for this credit are typically higher than for single filers. Your modified adjusted gross income (MAGI) is a crucial factor, as the credit amount may be reduced or eliminated if your MAGI exceeds certain levels set by the Internal Revenue Service (IRS).
What are some key tax provisions within the Internal Revenue Code that specifically address the tax obligations of married filing jointly filers and the treatment of their joint returns?
The Internal Revenue Code contains several tax provisions specific to married filing jointly filers and their joint returns. These provisions outline how their income, deductions, and credits are combined and calculated. For instance, there are specific tax brackets and a higher standard deduction amount for those married filing jointly. The tax code also details how capital gains and losses are treated on joint returns.
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