money State tax changes could mean bigger refunds for some this year
Numerous U.S. states made favorable tax changes for the 2020 tax year, meaning some taxpayers may get a bigger refund this filing season.
Arizona, Arkansas, and Massachusetts are among the states that lowered their tax rates for the 2020 tax year, while Minnesota and North Carolina — among others — stepped up their standard deductions. Meanwhile, some high-income earners in New Jersey may find themselves in a higher income tax bracket this year.
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"A lot of states saw income tax reductions in 2020, whether that be in the form of rate reductions or standard deduction increases," Katherine Loughead, a senior policy analyst at the Tax Foundation, told Yahoo Money. "Really almost everyone will benefit from these changes."
In Arizona, the second-, third-, fourth-highest marginal rates are all lower than in 2019, while the bottom tax bracket rate remained unchanged. Taxpayers in Arkansas who are taxed the top marginal rate will see their income tax rate drop from 6.9% to 6.6%.
The second marginal individual income tax rate in Wisconsin dropped from 5.84% to 5.21%. In Massachusetts, the single-rate individual income tax fell from 5.05% to 5.0% this tax year. Coloradans may also be surprised by a bigger refund after the adoption of Proposition 116 in November 2020 that decreased the individual income tax rate from 4.63% to 4.55% — retroactive to tax year 2020.
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"A lot of people were overpaying throughout the year and will get a larger refund than expected," Loughead said.
Arizona's standard deduction is also increasing, more than doubling to match the federal deduction. Additionally, Minnesota increased its standard deduction by adopting the federal standard deduction and North Carolina increased its standard deduction by 7.5% for all filing statuses this season. Virginia's standard deduction also went up.
'Many more taxpayers will have income exposed to that rate'
Taxpayers in California, Hawaii, and New Jersey will see the highest top marginal individual income tax rates this filing season of all states at 13.3%, 11%, and 10.8%, respectively. Seven states including Texas and Florida have no individual income taxes at all, while Tennessee and New Hampshire only tax interest and dividends income for 2020. In 2021, Tennessee will get rid of that tax, joining the states with no income tax.
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In New Jersey, the top marginal individual income tax rate has a lower income threshold, meaning some high-income earners may be moved into higher tax brackets. Previously, taxpayers making above $5 million (both single and joint filers) had to pay the top rate of 10.75%, but this year taxpayers making more than $1 million in income also pay that rate.
"The top rate itself didn’t change, but it kicks in at a much lower level than it used to," Loughead said. "New Jersey has the third-highest top marginal individual income tax rate in the country, and starting this filing season, many more taxpayers will have income exposed to that rate."
Denitsa is a writer for Yahoo Finance and Cashay, a new personal finance website. Follow her on Twitter @denitsa_tsekova
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