Here's Where State and Local Income Taxes Are Falling in 2018

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Millions of taxpayers expect that they'll pay less in tax under new the reform provisions to the IRS in 2018. In a few lucky areas, taxpayers will also get some relief at the state and local level.

Most states and municipalities are going through hard times financially, making it difficult to justify declines in taxes. Yet you'll still see a small number of jurisdictions that found ways to keep their state and local income taxes moving lower. Here's a short summary of the places where taxes dropped effective Jan. 1.

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Mississippi makes a small cut

Mississippi already has relatively low income tax rates, but taxpayers still got a small break at the beginning of 2018. Under a law passed in 2016, a five-year series of small annual tax cuts started to take effect on Jan. 1, and taxpayers can expect similar savings in future years through 2022.

Under the 2017 tax brackets, Mississippians paid 3% in tax on the first $5,000 in taxable income, 4% on the next $5,000, and 5% on everything above $10,000. The change for 2018 makes the first $1,000 of the 3% bracket exempt from tax entirely. That will produce savings of $30 for anyone with at least $1,000 of taxable income.

In future years, that $1,000 exemption will go up by $1,000 per year. So in 2019, the first $2,000 of the 3% bracket will be exempt from tax. Eventually, in 2022, the entire first $5,000 of taxable income will be exempt, saving many Mississippi residents $150 per year on their income tax bills and leaving the state with just its 4% and 5% state income tax brackets remaining.

An even bigger boon goes to self-employed individuals. As of Jan. 1, those who work for themselves will get to deduct 34% of their federal self-employment taxes, up from 17% for the 2017 tax year. By 2019, the Mississippi deduction for self-employment taxes will rise to 50%.

D.C. offers more tax relief

The District of Columbia isn't the first place that anyone would think of as a tax haven, but bipartisan tax reform back in 2014 successfully led to a steady decrease in taxation for residents of the nation's capital. Over time, new tax brackets with lower tax rates have come into effect, and the multiyear implementation of the district's tax reform measures have also included further ongoing tax cuts.

For 2018, personal exemptions were expected to be raised to conform to the federal level. That would presumably mean what would have been the federal level if personal exemptions still existed federally, because tax reform eliminated personal exemptions in favor of a higher standard deduction. If D.C. uses the initially projected federal numbers, as its 2018 withholding tables suggest it will, personal exemptions would rise from $3,700 to $4,150.

Similarly, standard deductions were expected to rise from $5,650 for singles, $7,800 for heads of household, and $10,275 for joint filers to conform to federal guidelines, which would have been $6,500 for singles, $9,550, and $13,000 respectively. That's still likely to be the case, although the D.C. Office of Tax and Revenue hasn't yet weighed in with an official notice to that effect.

Tennessee keeps delivering interest and dividend tax relief

Tennessee residents are fortunate enough not to have to pay state income tax on their earnings from work. Only a tax on dividend and interest income from investments applies within the state, and lawmakers have been looking to get rid of that tax as well.

Beginning in 2017, the Tennessee tax on interest and dividends, also known as the Hall Income Tax, is gradually phasing out. The initial rate of 5% was reduced to 4% last year, and effective Jan. 1, that rate again dropped to 3%. By 2021, the reduction will completely eliminate the tax, leaving Tennessee to join seven other states that have no income taxes at all on their residents.

Good news for taxpayers

The nice thing about state and local income tax reduction is that lower tax bills will also leave taxpayers to suffer a bit less from the federal decision to curb itemized deductions on state and local taxes. Starting in 2018, taxpayers will only be able to itemize a maximum of $10,000 annually in state and local taxes. Paying less will mean losing fewer deductions for those with high incomes in these jurisdictions.

In many states, financial pressure could spur higher taxes in the future. That makes these places that much more extraordinary, although there's no guarantee that they won't reverse course in future years and seek tax increases.

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