State and local taxes are the income, sales, property, and excise taxes that governments below the federal level charge to pay for schools, roads, police, and other public services in your community. They also show up on your federal return: if you itemize, the SALT deduction lets you write off up to $40,400 of state and local taxes paid in 2026, a sharp increase from the $10,000 cap that ran from 2018 through 2025. What you actually owe, and what you can deduct, depends on where you live, what you buy, what you own, and how you earn.
State Income Taxes
Forty-one states collect a broad-based personal income tax on wages, salaries, and investment earnings. Eight states impose no personal income tax at all, relying instead on sales taxes, severance taxes on natural resources, or other revenue sources. One additional state taxes only certain investment gains rather than wages.
The structures vary. Some states use a single flat rate applied to all taxable income. Others use progressive brackets where the rate climbs as income rises. Among progressive-bracket states, bottom rates start as low as 1%, and the highest top marginal rate in the country reaches 13.3%.
Most states piggyback on the federal system, using your federal adjusted gross income or federal taxable income as the starting point for the state return and then applying their own adjustments and credits. If you’re a resident, you typically owe your state’s tax on all income regardless of where you earned it. If you’re a nonresident, you generally owe that state tax only on income sourced within its borders.
When You Work in One State and Live in Another
People who live in one state and work in another can end up facing tax obligations in both. To prevent the same dollar from being taxed twice, most states offer a credit on your resident return for income taxes you paid to the state where you worked. You file a nonresident return in the work state first, pay tax there on your work income, then claim a credit for that payment on your home state return. The credit is limited to the lesser of what you actually paid the other state or what your home state would have charged on that same income.
Some neighboring states cut through this entirely with reciprocal agreements. Under those arrangements, your employer withholds only for the state where you live, and you owe nothing to the state where you physically work. This is especially useful for cross-border commuters and hybrid workers who split time between a home office and an office across the state line.
Enforcement
States enforce income tax compliance through auditing programs and data-sharing partnerships with the IRS. Federal and state agencies exchange audit results, return information, and employment tax data, making it difficult to report different figures on your federal and state returns.1Internal Revenue Service. IRS Information Sharing Programs Filing or paying late triggers penalties and interest, and persistent noncompliance can lead to liens on your property or wage garnishment.
Sales and Use Taxes
Forty-five states levy a statewide sales tax on purchases of goods and certain services. State-level rates generally fall between 4% and 7%, and cities and counties often stack their own percentage on top. In high-tax areas, the combined rate can exceed 10%.
Online purchases are not a way around it. In 2018, the Supreme Court ruled in South Dakota v. Wayfair, Inc. that states can require out-of-state sellers to collect sales tax even if the seller has no physical location in the state, as long as the seller exceeds a minimum level of sales activity there.2Supreme Court of the United States. South Dakota v. Wayfair, Inc. (2018) Every state with a sales tax has since enacted marketplace facilitator laws requiring platforms to collect and remit tax on behalf of the third-party sellers using their sites. If a seller still doesn’t charge you sales tax, you’re legally on the hook for the equivalent “use tax,” which you’re supposed to self-report on your state return.
Many states exempt necessities. Groceries, prescription drugs, and certain medical supplies are the most common carve-outs. Some states also run short “tax holiday” weekends where specific categories, like school supplies or emergency preparedness items, can be purchased tax-free.
Property Taxes
Property taxes are the financial backbone of local government. Counties, school districts, and fire departments depend on them more than any other single revenue source. The tax is calculated on the assessed value of your real estate: a local assessor determines what your land and buildings are worth based on comparable sales and market conditions, then applies an assessment ratio to arrive at the taxable portion of that value.
Your actual bill is set by the mill rate, sometimes called the millage rate, which represents a dollar amount per $1,000 of assessed value. One mill equals one dollar of tax for every $1,000 of assessed value. You may see separate mill rates from the county, the city, and the school district all appearing on the same bill. The revenue stays highly localized: school district mills pay teacher salaries, county mills fund road maintenance.
Some jurisdictions also tax personal property like cars, boats, or business equipment, usually through annual vehicle registration or a separate personal property declaration. If you believe your assessment is wrong, you have the right to appeal it, typically to a local review board. Prolonged nonpayment can result in a tax lien, and eventually the government can auction the property to recover the debt.
Homestead Exemptions and Other Relief
Most states offer at least one form of property tax relief for homeowners. Homestead exemptions are the most widespread, reducing the taxable value of your primary residence by a fixed dollar amount. Many jurisdictions also provide additional breaks for seniors, disabled residents, and veterans, including assessment freezes that prevent the taxable value of a qualifying home from increasing year over year. Eligibility rules and application deadlines differ by locality, so checking with your county assessor’s office before the filing window closes is worth the effort.
Excise Taxes
Excise taxes target specific products or activities rather than general spending. You pay them on motor fuel, tobacco, alcohol, hotel stays, and a growing list of other goods. Unlike sales tax, excise taxes are often baked into the price rather than added at checkout, so you may not notice them as a separate line item.
Motor fuel taxes are the most universal, and they’re earmarked almost exclusively for road and bridge maintenance. State gasoline tax rates range from about $0.10 per gallon to nearly $0.60 per gallon, and some states add a percentage-based sales tax on top of the per-gallon excise. Cigarette excise taxes vary even more widely, running from under $0.20 per pack in the lowest-tax state to over $5.00 in the highest.
Cannabis and sports betting have become meaningful excise categories as legalization spreads. Cannabis tax structures come in three forms: a percentage of the retail price, a per-weight charge paid by the cultivator, or a potency-based tax tied to THC content. State-level cannabis tax rates on retail sales range from 6% to 37% of the purchase price, and many localities add their own surcharge. Sports betting and other gaming activities carry state-imposed taxes on operator revenue, with rates and structures that vary considerably.
Taxes That Businesses Pay
Businesses face state and local taxes that individuals never see on their personal returns. The most common is the franchise tax or gross receipts tax. A franchise tax may be calculated as a percentage of revenue, net worth, or capital held in the state, while a gross receipts tax applies to total sales without subtracting expenses. Some states impose both. At the local level, municipalities may charge business license taxes based on gross receipts, employee headcount, square footage, or a flat fee.
Real estate transfer taxes catch people off guard. When you sell or buy property, a majority of states charge a tax based on the sale price. Rates typically range from a fraction of a percent up to around 2% or more, and some jurisdictions layer on additional surcharges for high-value transactions. These are due at closing and are separate from any ongoing property tax.
How States Decide You’re a Resident
Which state gets to tax you depends on where you’re considered a resident, and that question has more layers than most people expect. Your “domicile” is the state you consider your permanent home and intend to return to. States look at concrete signals: where you’re registered to vote, where your driver’s license is issued, where you own property, and where your vehicles are registered. Voter registration is often treated as the strongest indicator of intent.
Beyond domicile, many states have “statutory residency” rules that can make you a tax resident even if you’re domiciled elsewhere. The most common trigger is spending more than 183 days in a state while also keeping a place to live there. Any part of a day spent in the state generally counts as a full day. A handful of states apply the day-count test based on physical presence alone. If you split time between two states and aren’t careful about tracking your days, you can end up qualifying as a resident in both, creating a complicated dual-filing situation.
The Federal SALT Deduction
When you file your federal return, you can choose to itemize deductions instead of taking the standard deduction. If you itemize, the SALT deduction lets you subtract the state and local taxes you paid during the year from your federal taxable income. The eligible taxes include state and local income taxes (or general sales taxes, if you prefer that option) plus real estate taxes and personal property taxes.3Internal Revenue Service. Topic No. 503, Deductible Taxes You report these on Schedule A of Form 1040.4Internal Revenue Service. Instructions for Schedule A (Form 1040)
The 2026 Cap
The Tax Cuts and Jobs Act of 2017 capped the SALT deduction at $10,000 ($5,000 for married filing separately) for tax years 2018 through 2025. Starting with the 2025 tax year, the One Big Beautiful Bill Act raised the cap to $40,000 ($20,000 for married filing separately).4Internal Revenue Service. Instructions for Schedule A (Form 1040) For 2026, the cap increases by 1% to $40,400 ($20,200 for married filing separately).5Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 That 1% annual adjustment continues through 2029.
The higher cap comes with a phaseout for high earners. Once your modified adjusted gross income exceeds $505,000 in 2026 ($252,500 for married filing separately), the deduction shrinks by 30 cents for every dollar of excess income, bottoming out at a floor of $10,000. A filer earning well over $600,000 may end up right back at the old effective limit despite the higher cap. The raised cap primarily benefits middle-income and upper-middle-income households in high-tax areas.
Itemizing Has to Beat the Standard Deduction
The SALT deduction only helps if your total itemized deductions exceed the standard deduction. For 2026, 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 combined SALT, mortgage interest, charitable contributions, and other Schedule A items don’t clear that bar, the standard deduction gives you a bigger tax break and SALT becomes irrelevant to your federal bill.
The Pass-Through Entity Workaround for Business Owners
If you own a business structured as a partnership or S corporation, over 30 states now offer a workaround that sidesteps the individual SALT cap entirely. Under these pass-through entity tax (PTET) elections, the business itself pays state income tax at the entity level instead of passing the obligation through to the owners’ personal returns. The IRS confirmed in Notice 2020-75 that these entity-level payments are deductible against the business’s income and are not subject to the individual SALT cap.6Internal Revenue Service. Notice 2020-75 Owners then receive a credit on their personal state returns, avoiding double taxation. Even with the higher $40,400 cap for 2026, the PTET election can still produce meaningful federal savings for business owners whose state tax liability exceeds that amount.
State Refunds Received Later
If you deducted state income taxes on a prior-year federal return and later received a state refund, you may need to report part or all of that refund as income on your next federal return. This applies only to the extent the original deduction actually reduced your federal tax. If you hit the SALT cap and couldn’t deduct the full amount you paid, the refund of that excess portion isn’t taxable federally.7Internal Revenue Service. IRS Issues Guidance on State Tax Payments Keep your W-2 withholding statements, estimated tax payment records, and property tax receipts so you can accurately calculate what you’re entitled to deduct and what refund amounts, if any, need to be reported.