State and local taxes are the income, sales, property, and excise taxes that state and local governments charge on top of what you owe the federal government. They fund schools, roads, police, and most of what happens outside Washington, and they can add up to a significant share of your total tax bill depending on where you live. For the 2026 tax year, you can deduct up to $40,400 of them on your federal return if you itemize, though that amount phases down once your income passes $505,000.
State Income Taxes
Most states collect an income tax on wages, investment gains, and business profits earned within their borders. Nine states do not tax wages at all: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. Washington does tax capital gains above a certain threshold. Everyone else living or working in the remaining states or the District of Columbia owes state income tax on at least part of their earnings.
States that levy an income tax follow one of two structures. About 14 use a flat rate — every taxpayer pays the same percentage regardless of income, like 3% in Indiana or 5% in Kentucky. The rest use a graduated system with multiple brackets, where higher portions of your income are taxed at higher rates. Top marginal rates in graduated states range from about 2.5% up to 13.3%.1Tax Foundation. State Individual Income Tax Rates and Brackets, 2025 Most states start with your federal adjusted gross income and then apply their own adjustments to reach your state taxable income.
Estimated Payments for Non-Wage Income
If a meaningful share of your income comes from self-employment, freelancing, or investments where no tax is withheld, your state probably wants quarterly estimated payments. Thresholds vary: some states require them once you expect to owe as little as $500 after withholding and credits. Missing a quarterly deadline can trigger an underpayment penalty even if you pay the full balance when you file. Check your state tax agency for the threshold and due dates that apply to you.
Local Income and Earnings Taxes
On top of the state tax, some cities and counties impose their own income or earnings taxes. This layer catches many people off guard, especially those who move into or commute to a city that collects one. Major examples include New York City, Philadelphia, Detroit, Baltimore, Cleveland, Columbus, St. Louis, and Kansas City. Rates run from under 1% in smaller jurisdictions to roughly 3.9% in Philadelphia.
How the tax works depends on the city. Some piggyback on the state return, calculating local tax as a percentage of your state liability. Others require a separate filing with their own definitions of taxable income. In a few places, the tax applies to anyone who works within city limits, not just residents. If you commute across a city or county line, find out whether your workplace jurisdiction taxes nonresidents.
Sales and Use Taxes
Sales tax is added to most purchases at the register. The state sets a base rate, and counties or cities often stack their own surcharges on top. Combined rates typically fall between about 4% and over 10%, depending on where you shop. Five states have no statewide sales tax: Alaska, Delaware, Montana, New Hampshire, and Oregon. Alaska localities can charge their own, so some Alaskan shoppers still pay at checkout.
Many states exempt necessities such as unprepared groceries, prescription drugs, and sometimes clothing to ease the burden on lower-income households. The specifics differ by state, so an item that’s tax-free in one place may not be in another.
Buying From Out of State
The use tax is the companion to the sales tax. It applies when you buy something from another state or online and the seller doesn’t collect your home state’s sales tax. Technically, you owe use tax on those purchases and report them on your state return. Enforcement was historically difficult until the U.S. Supreme Court’s 2018 decision in South Dakota v. Wayfair, which allowed states to require out-of-state sellers to collect sales tax even without a physical presence in the state.2Supreme Court of the United States. South Dakota v. Wayfair, Inc. That ruling opened the door for marketplace facilitator laws, which make platforms like Amazon, Etsy, and eBay collect and remit sales tax on behalf of their third-party sellers.
Property Taxes
Property taxes are the primary revenue source for local governments, funding schools, fire departments, law enforcement, and road maintenance. A local assessor determines the market value of your home or commercial property, often applying an assessment ratio to reach the taxable value. Your bill is then calculated using a millage rate: one mill equals one dollar of tax for every $1,000 of assessed value. A home assessed at $200,000 in a jurisdiction with a 20-mill rate would owe $4,000.
Personal Property Taxes
In some states, property tax reaches beyond real estate to tangible personal property such as vehicles, boats, or business equipment. The annual tax is based on the item’s current market value, which declines through depreciation. Vehicle personal property tax bills range from nothing in states that don’t impose one to well over $1,000 where rates are high and the vehicle is expensive. If you move, check whether your new state’s vehicle registration includes a value-based tax.
Exemptions and Relief Programs
Most states offer a homestead exemption that reduces the taxable value of your primary residence by a set amount. To qualify, you generally must own and occupy the home as of a specific date, often January 1 of the tax year. The dollar amount shielded varies widely, from several thousand dollars to six figures. Many states add breaks for seniors, veterans, and people with disabilities, sometimes including an income-based freeze that caps how much your assessed value can rise. Your local assessor’s office can confirm which exemptions you qualify for and how to apply.
Appealing and the Cost of Nonpayment
If you think your assessed value is too high, you can appeal. The process typically involves filing a protest with a local review board within a set window, often 30 to 90 days after you receive the assessment notice. Comparable sales data or an independent appraisal can support a lower value. If the local board rules against you, most jurisdictions allow a further appeal to a state court.
Falling behind on property taxes carries serious consequences. Most jurisdictions place a lien on the property shortly after the bill becomes delinquent. If the debt goes unpaid, often for two or more years, the government can foreclose and sell the home at public auction.
Excise Taxes and Specialized Levies
Excise taxes target specific products rather than general spending. Gasoline, tobacco, and alcohol are the most common examples, and the tax is usually baked into the shelf price rather than added at the register. State gasoline taxes range from about 11 cents per gallon to nearly 60 cents per gallon, with the revenue typically funding highway maintenance and transit.3Federation of Tax Administrators. State Motor Fuel Tax Rates Tobacco taxes both raise revenue and discourage smoking, with proceeds often earmarked for public health programs.
Local governments also collect specialized levies. Hotel occupancy taxes can add 10% to 15% or more to a nightly room rate, capturing revenue from visitors who use local roads and services without paying local income or property tax. Real estate transfer taxes and amusement taxes on event tickets are other common examples.
Working Across State Lines
If you work in one state and live in another, you may owe tax to both. About 16 states and the District of Columbia have reciprocity agreements that simplify this: if your home state and work state have one, you pay only your home state. You file an exemption form with your employer so they withhold for the correct state.
Without a reciprocity agreement, you generally file a nonresident return where you work and a resident return where you live. To prevent double taxation, most states offer a credit on the resident return for taxes paid to the other state. The credit typically covers wages and business income but may not cover investment income like dividends or interest. If you work remotely for an out-of-state employer, a handful of states apply a “convenience of the employer” rule that can tax you based on the employer’s location rather than yours, so it pays to check both jurisdictions.
Deducting State and Local Taxes on Your Federal Return
Federal law lets you deduct certain state and local taxes when you itemize. Under 26 U.S.C. § 164, the eligible taxes include state and local income taxes (or sales taxes, if you choose that instead), plus real and personal property taxes.4Office of the Law Revision Counsel. 26 USC 164 – Taxes You pick whichever is larger between income taxes and sales taxes, then add your property taxes for the total known as the SALT deduction.
The 2026 SALT Cap
The Tax Cuts and Jobs Act of 2017 introduced a $10,000 cap on SALT deductions starting in 2018. The One Big Beautiful Bill Act, signed into law in 2025, raised that cap significantly. For the 2026 tax year, you can deduct up to $40,400 ($20,200 if married filing separately).4Office of the Law Revision Counsel. 26 USC 164 – Taxes The higher cap comes with an income-based phase-out: once your modified adjusted gross income exceeds $505,000, the $40,400 cap gradually shrinks, and it drops back to $10,000 once income passes roughly $606,000. The increased cap is temporary, lasting through the 2029 tax year, after which it reverts permanently to $10,000.
When Itemizing Is Worth It
The SALT deduction only helps if your total itemized deductions beat the standard deduction. For the 2026 tax year, the standard deduction is $16,100 for single filers, $32,200 for married couples filing jointly, and $24,150 for heads of household.5Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 If your SALT payments, mortgage interest, charitable contributions, and other itemized deductions don’t top that, take the standard deduction and skip itemizing.6Internal Revenue Service. Credits and Deductions for Individuals
If you do itemize, keep thorough records. Property tax bills, state return copies, and receipts for major purchases (when you deduct sales taxes instead of income taxes) all serve as documentation in an audit. The IRS can disallow any deduction you cannot substantiate.