Many States Cut Income Tax Rates, 1 Passed Retroactive Law

Before we get too far into the new year, double-check that all changes to state income tax rates and laws have been caught.

Better for Payroll to uncover glitches as early as possible to avoid withholding and reporting headaches, especially for multi-state employers.

First, we’ll take a look at the 2024 income tax rates across the country. Next, we’ll give you the details on a last-minute, retroactive law from Pennsylvania.

Income tax info by state

The Tax Foundation recently provided a state-by-state update on 2024 rates.

Here’s a recap of the data found in State Individual Income Tax Rates and Brackets, 2024, which was released on February 20, 2024.

No tax. In 2024, as in past years, seven states have no individual income tax.

Those states are: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas and Wyoming.

Flat tax rate. In 14 states, the income tax rate is flat.

Two of those states don’t tax wages and salaries – i.e., New Hampshire taxes only income from dividends and interest, and Washington taxes only income from capital gains.

Here are the 2024 rates from the remaining 12 states:

• Arizona – 2.5%
• Colorado – 4.4%
• Georgia – 5.49% (decreased)
• Idaho – 5.8%
• Illinois – 4.95%
• Indiana – 3.05% (decreased)
• Kentucky – 4.0% (decreased)
• Michigan – 4.25% (increased)
• Mississippi – 4.70% (decreased)
• North Carolina – 4.50% (decreased)
• Pennsylvania – 3.07%, and
• Utah – 4.65%.

Rates based on brackets. Finally, 29 states have established a graduated-rate income tax system. The number of brackets can vary from state to state. For example, Montana has the fewest (two) and Hawaii has the most (12).

A handful of states reserve their highest rates for individuals whose income reaches or exceeds $1 million. Those states are California, Massachusetts, New Jersey and New York.

In several of the 29 states with bracketed systems, the top brackets have decreased for 2024. They include Arkansas (4.4%, was 4.90%), Iowa (5.7%, was 6%), Missouri (4.8%, was 4.95%), Montana (5.9%, was 6.75%), Nebraska (5.84%, was 6.64%), Ohio (3.5%, was 3.99%) and South Carolina (6.4%, was 6.5%).

A surprise Pennsylvania law

In the middle of December 2023, the Pennsylvania legislature passed a law affecting employers that offer dependent care assistance programs.

While on the federal level, up to $5,000 annually can be excluded from income as a nontaxable fringe benefit, the same tax advantage hadn’t applied in Pennsylvania. But HB 1300 changed that.

The state legislature passed HB 1300 on December 14, 2023 – and it applies retroactively, all the way back to the beginning of 2023.

According to the law, amounts paid or incurred by an employer for dependent care assistance programs (up to $5,000 per year per employee) should be excluded from personal income tax in Pennsylvania, starting with tax year 2023.

The Pennsylvania Dept. of Revenue (DOR) explained how employers should handle the situation.

If employers have already filed their tax year 2023 W-2s with the DOR, the next step would be to file corrected W-2s where applicable, excluding the dependent care benefits (up to $5,000). You’d also need to provide employees with the updated forms and make them aware of the change.

However, employers shouldn’t amend Forms W-3 to remove the withholding. When employees file their state income tax forms, they can obtain a refund at that time.

For TY 2024, employers should make sure they’re not withholding Pennsylvania personal income tax for this fringe benefit. When it’s time to file Forms W-2 for tax year 2024, double-check that dependent care benefits reported in box 10 aren’t included in box 16 as state wages.

Given that the Pennsylvania income tax rate remains unchanged at 3.07% for both 2023 and 2024, employees who max out the fringe benefit at $5,000 will be able to keep $154 per year.