2023 State Tax Changes, Effective January 1, 2023 – Tax Foundation

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Katherine Loughead, Janelle Fritts, Timothy Vermeer, Adam Hoffer
Most state tax changes take effect at the beginning of the calendar year (January 1) or at the beginning of the fiscal year (July 1 for most states).
On January 1, 2023, thirty-eight states have noteworthy tax changes taking effect. Most of these changes represent net tax reductions, the result of an unprecedented wave of rate reductions and other tax cuts in the past two years as states respond to burgeoning revenues, greater tax competition in an era of enhanced mobility, and the impact of high inflation on residents.
Eleven states have individual income tax rate reductions taking effect on January 1: Arizona, Idaho, Indiana, Iowa, Kentucky, Mississippi, Missouri, Nebraska, New Hampshire (interest and dividends income only), New York, and North Carolina. Three of these states—Arizona, Idaho, and Mississippi—are converting from graduated-rate income tax structures to flat tax structures on New Year’s Day.
One state, Massachusetts, has an income tax rate increase taking effect. Massachusetts’s individual income tax will convert from a flat to a graduated-rate tax with a new rate of 9 percent on income exceeding $1 million.
Five states—Alabama, Delaware, Iowa, Rhode Island, and Nebraska—are newly exempting all or a portion of retirement income or military pension income from income taxation.
Two states, Hawaii and Illinois, will expand their earned income tax credits (EITCs).
Five states—Arkansas, Iowa, Nebraska, New Hampshire, and Pennsylvania—have corporate income tax rate reductions taking effect.
One state, Oklahoma, will offer permanent 100 percent bonus depreciation (full expensing) despite the federal government’s phasedown to 80 percent bonus depreciation under Section 168(k).
One state, Vermont, will repeal its throwback rule.
Two states, Louisiana and North Carolina, will make their capital stock taxes less burdensome.
Virginia will newly exempt groceries from its state sales tax base, while Kansas will begin phasing in a state sales tax exemption for groceries by applying a preferential rate. Several states will implement other notable new sales tax exemptions, with Colorado and Iowa newly exempting diapers and menstrual products and Virginia exempting certain essential hygiene products, including menstrual products.
One state, Kentucky, will newly apply its sales tax to select services to help pay for individual income tax rate reductions.
One state, Missouri, has a sales tax economic nexus statute taking effect.
Seven states—Connecticut, Florida, Illinois, Michigan, New York, North Carolina, and Utah—will see gas taxes increase on January 1, either due to inflation indexing, automatic adjustments tied to the average price of fuel, or the expiration of gas tax holidays.
One state, New Jersey, will increase its excise tax on recreational marijuana.
These and other tax changes taking effect on January 1 are detailed below. In addition to the notable tax changes mentioned below, many states have routine or less notable tax changes taking effect that are not mentioned here. These include, but are not limited to, annual adjustments to income tax brackets, standard deductions, and personal exemptions; automatic formula-based changes to unemployment insurance taxes; changes in interest rates on taxes owed; administrative changes; and changes to tax credits and other narrow-based taxes or tax provisions.
Under current law, Alabama’s business privilege tax has a minimum payment of $100 per year, but that minimum will phase out as a result of H.B. 391, enacted in April 2022. Starting in 2023, the minimum tax owed will decrease from $100 to $50. Beginning in 2024, businesses with a liability of $100 or less will no longer be required to remit a business privilege tax payment.
Separately, under H.B. 162, enacted in April 2022 and beginning in 2023, Alabama will exempt the first $6,000 of otherwise taxable retirement income for those 65 or older. Click here to return to top.
Beginning in 2023, long-scheduled changes to Alaska’s production tax, or its severance tax on oil and natural gas extraction, will take effect, increasing tax liability for some companies. Specifically, fields that began production before 2017 will no longer be able to claim a 20 or 30 percent gross value reduction starting in January 2023 or after three years of the Alaska North Slope (ANS) price exceeding $70.
On January 1, Arizona will join the growing list of states with a flat individual income tax structure, one year earlier than originally anticipated. Under S.B. 1828, enacted in June 2021, Arizona has been in the process of consolidating its individual income tax brackets. The law established tax triggers that made the speed of the 2.5 percent flat tax phase-in contingent upon the speed at which the state reached specified revenue targets. Since Arizona reached the final revenue target sooner than anticipated, the rate schedule will convert directly from a two-bracket structure with rates of 2.55 and 2.98 percent to a flat rate of 2.5 percent, without the need for another year of a two-rate structure.
Furthermore, S.B. 1738, enacted in June 2022, aligns the income tax rate for pass-throughs electing to be taxed at the entity level with the individual income tax rate, thus bringing the entity-level rate to 2.5 percent two years earlier than expected.
In August 2022, Arkansas legislators passed H.B. 1002, a bill to accelerate previously planned individual and corporate income tax rate reductions. The reduction in the top marginal individual income tax rate from 5.5 to 4.9 percent was retroactive to 2022, but the reduction in the top marginal corporate income tax rate from 5.9 to 5.3 percent takes effect on January 1, 2023.
Beginning January 1, cannabis retailers, rather than distributors, will be responsible for collecting and remitting related excise taxes.
Additionally, California’s new lithium extraction tax takes effect on January 1, with payments based on the weight of lithium extracted by the taxpayer.
Starting January 1, 2023, sales of diapers and menstrual products will be exempt from the state sales tax as a result of H.B. 22-1055, enacted in June 2022.
Beginning January 1, Connecticut will utilize a vehicle miles traveled (VMT) tax for large commercial trucks as a result of H.B. 6688, enacted in June 2022. Specifically, taxpayers will pay between 2.5 and 17.5 cents (based on weight) per mile for every mile traveled in the state.
Additionally, Connecticut’s gas tax holiday expires at the start of the new year. The state plans to phase in the 25-cent gas tax at five cents per month for five months.
Due to the enactment in July 2022 of Senate Substitute 1 for S.B. 188, Delaware will increase its military pension exclusion from $2,000 to $12,500 for military retirees under the age of 60 as of January 1.
Florida’s excise tax on gas and diesel fuel will increase by 1.2 cents per gallon as part of an automatic inflation adjustment written into state law, bringing the tax from 19 to 20.2 cpg for both gasoline and diesel. The State Comprehensive Enhanced Transportation System (SCETS) tax rate on gasoline and diesel will also increase, rising from 8.3 to 8.6 cpg for gasoline and from 15.3 to 15.9 cpg for diesel.
As a result of H.B. 593, enacted in March 2021, Georgia’s standard deduction will increase from $4,600 to $5,400 for single filers and from $6,000 to $7,100 for joint filers.
Georgia voters approved Referendum A in November, which will result in timber equipment being exempted from ad valorem property taxes as of January 1. 
Hawaii’s earned income tax credit (EITC) will become refundable beginning in 2023 as a result of H.B. 2510, enacted in June 2022.
Under H.B. 1, enacted in September 2022, Idaho will move to a flat individual income tax structure at a rate of 5.8 percent, down from the current top marginal rate of 6 percent. As this law was designed in part to supersede a tax increase proposal that was approved for the ballot but later withdrawn, the law technically takes effect January 3, 2023, but its provisions apply retroactively to January 1, 2023, and we have elected to include it in this update.
Inflation adjustments to Illinois’s gas tax will resume in January, following a six-month delay of the inflation adjustment that would have increased the gas tax by 2.2 cents per gallon in July 2022. Starting January 1, a gas tax increase of 3.1 cpg will take effect, bringing the total state gas tax to 42.3 cpg. Illinois’s annual inflation adjustments are the result of a 2019 state law that also doubled the gas tax from 19 to 39 cpg. Since the July 2022 inflation adjustment was delayed until January 2023, Illinois is scheduled to see two inflation adjustments in 2023, with one occurring in January and another in July to compensate for inflation in fiscal year 2023.
On January 1, Illinois’s EITC will also increase from 18 to 20 percent of the federal credit amount, as a result of a budget provision included in S.B. 157, enacted in April 2022.
Under H.B. 1002, enacted in March 2022, Indiana’s flat individual income tax rate will be reduced from 3.23 to 3.15 percent effective for 2023 and 2024, with triggers in place that could reduce the rate to 2.9 percent by 2029 if specified conditions are met.
Additionally, under H.B. 1260, enacted in March 2022, Indiana’s $3,000 mortgage deduction will be repealed, while the property tax homestead deduction will increase by $3,000, allowing taxpayers to deduct the lesser of 60 percent of the assessed value of the property or $48,000 (up from $45,000) in 2022. Additionally, senior citizens may claim a tax deduction on homes valued up to $240,000 (up from $200,000) in 2022.
Under S.B. 382, enacted in March 2022, Indiana is phasing out its add-back of the federal income tax deduction allowed for wagering taxes, with the add-back decreasing from 50 to 37.5 percent of the federal amount.
Iowa enacted comprehensive tax reforms in 2018, 2021, and 2022, and many of these reforms will continue phasing in with the new year. Most notably, effective January 1, Iowa’s nine individual income tax rates will be consolidated into four, and the top rate will decrease from 8.53 to 6 percent. (Iowa’s graduated-rate tax structure is scheduled to shift to a flat tax at a rate of 3.9 percent in 2026.) Additionally, Iowa’s three-bracket corporate income tax will be consolidated into a two-bracket tax, with the top rate decreasing from 9.8 to 8.4 percent, as a result of revenue triggers being met that will cause this reduction to occur at least four years earlier than initially anticipated. The individual alternative minimum tax rate will be set at 6 percent for 2023 and will phase down over time. In addition, starting in 2023, the standard deduction and state deduction for federal taxes paid will be repealed, broadening the base to help pay for reductions to the rate. Iowa will also exempt retirement income and certain farm rental income from taxation beginning January 1, and phase out its inheritance tax by 2025, with a further reduction in rates taking effect on January 1.
Separately, under S.F. 2367, enacted in June 2022, Iowa will exempt diapers and menstrual products from its sales tax beginning January 1.
Kansas will begin applying a preferential sales tax rate to groceries, following the enactment of H.B. 2106 in May 2022. Specifically, the state sales tax on groceries is scheduled to phase down to 4 percent in 2023 and 2 percent in 2024 before phasing down to zero in 2025. The general sales tax rate remains 6.5 percent.
In April 2022, H.B. 8 was enacted, reducing individual income tax rates while broadening the sales tax base. Many of the law’s provisions take effect on January 1, 2023, including the initial reduction in the individual income tax rate from 5 to 4.5 percent and the application of the sales tax to additional services, including many personal consumption services and some business inputs. For some services, including limousine, car rental, ridesharing, carsharing, and taxicab services, a 6 percent excise tax will be applied in lieu of the general sales tax.
The law also established tax triggers that, contingent upon revenue meeting certain benchmarks, could phase down the individual income tax rate to zero over many years, starting with a likely further reduction from 4.5 to 4.0 percent in 2024.
Starting January 1, 2023, a new excise tax of 3 cents per kilowatt hour will be applied to electric vehicle power distributed in Kentucky by an electric vehicle power dealer or by electric charging stations located on state property. Further, electric and hybrid vehicles will be subject to a new registration and renewal fee of $120 for electric vehicle owners and $60 for electric motorcycle and hybrid vehicle owners. Finally, the 1 percent state transient room tax will newly apply to campgrounds and RV parks.
As a result of the tax reform package enacted in 2021, Louisiana’s corporation franchise tax rate will decrease from 0.3 to 0.275 percent in 2023.
Beginning January 1, 2023, the sales tax exemption for residential electricity will be expanded for eligible customers enrolled in either a low-income assistance program administered by the Maine State Housing Authority or in an arrearage management program administered by electric transmission and distribution utilities. The current exemption was limited to the first 750 kilowatt hours of residential electricity per month.
Maryland temporarily increased the refundable version of its EITC from 28 percent in 2019 to 45 percent for tax years 2020 through 2022 with the enactment of S.B. 496 in February 2021. The credit is set to revert to 28 percent for tax years 2023 and beyond.
The November 2022 passage of Massachusetts Question 1, a legislatively referred constitutional amendment, will modify the state’s constitution to add a 4 percent surtax to the current 5 percent individual income tax rate for annual income above $1 million. Massachusetts has had a flat-rate individual income tax since 1917. Further analysis of the amendment, including its potential economic impact, is available here.
Michigan will increase its gas tax by 1.4 cents per gallon due to an automatic inflation adjustment required by state law. The annual adjustment is set at 5 percent or the annual rate of inflation, whichever is lower.
Mississippi will move to a flat individual income tax structure as a result of H.B. 531, enacted in April 2022. Effective January 1, 2023, the current 4 percent tax on taxable income between $5,000 and $10,000 will be eliminated, leaving a single rate of 5 percent on income exceeding $10,000. The flat rate will then phase down to 4.7 percent in 2024, 4.4 percent in 2025, and 4.0 percent in 2026.
In October 2022, Missouri legislators passed S.B. 3, a bill to expedite planned individual income tax rate reductions and replace existing tax triggers with triggers that reduce the top marginal rate further and faster than planned in previous legislation enacted in 2014 and 2021. Effective January 1, Missouri’s top marginal individual income tax rate will be reduced from 5.3 to 4.95 percent, and the amount of income that is exempt from Missouri’s individual income tax rates will increase from $100 to $1,000. Existing triggers seek to eventually reduce the top rate to 4.5 percent.
Additionally, Missouri’s economic nexus law for remote sales tax collections will take effect on January 1. As a result of the enactment of S.B. 153 in June 2021, the state will require remote sellers and marketplace facilitators with more than $100,000 in annual sales into Missouri to collect Missouri’s state and local sales tax. Missouri is the final state with a sales tax to put these requirements into place.
In 2022, Nebraska enacted several tax reforms that will take effect on January 1. Under L.B. 873, enacted in April 2022, Nebraska will reduce both its top marginal individual income tax rate and its top marginal corporate income tax rate to 5.84 percent by 2027. The individual income tax will be reduced by 0.2 percentage points per year, with an initial reduction from 6.84 to 6.64 percent in 2023. The top marginal corporate income tax rate will decrease from 7.5 to 7.25 percent effective January 1, as a result of L.B. 432, enacted in May 2021. The 2022 reforms also expedite a preexisting phase-in of an income tax exemption for Social Security benefits. In 2023, taxpayers may deduct 60 percent of Social Security benefits included in federal adjusted gross income (AGI), up from 40 percent in 2022. The same law also increases funding for tax credits issued under the Nebraska Property Tax Incentive Act, allocating $560.7 million for income tax credits to offset a portion of school district property taxes paid and $100 million to offset a portion of community college property taxes paid.
Separately, following the enactment of L.B. 310 in February 2022, Nebraska will reduce the inheritance tax for all classes of beneficiaries, including immediate relatives, remote relatives, and non-related individuals, by reducing rates and increasing exemptions. The lower rates and higher exemptions will apply for beneficiaries of decedents dying on or after January 1, 2023.
New Hampshire will begin phasing out its income tax on interest and dividends income in 2023, bringing the rate down from 5 to 4 percent. This is the result of H.B. 2, enacted in June 2021. The rate is scheduled to phase down by one percentage point per year until the tax is phased out entirely in 2027.
Separately, H.B. 1221, enacted in June 2022, reduces the Business Profits Tax (New Hampshire’s version of a corporate income tax) rate from 7.6 to 7.5 percent for taxable periods ending on or after December 31, 2023, meaning the 7.5 percent rate will apply throughout calendar year 2023.
On January 1, New Jersey’s recreational marijuana excise tax (called the Social Equity Excise Tax Fee) will increase from $1.10 to $1.52 per ounce.
New York’s budget for fiscal year 2023, enacted in April 2022, accelerates income tax rate reductions originally passed in 2016 for middle-income earners. Under S. 8009, rate reductions originally scheduled for 2025 will take effect two years earlier than planned, bringing the rate on income between $13,900 and $80,650 (single filers) and between $27,900 and $161,550 (joint filers) to 5.5 percent and bringing the rate on income between $80,650 and $215,400 (single filers) and between $161,500 and $323,200 (joint filers) to 6 percent. For tax year 2022, the tax rates on those levels of income are 5.85 and 6.25 percent, respectively.
Additionally, New York is set to resume collection of its motor fuel excise tax, state sales tax on fuel, and Metropolitan Commuter Transportation District sales tax on motor fuel and diesel motor fuel on January 1, 2023. The suspension of those fuel taxes provided a price reduction of 16 cents per gallon since June 1, 2022.
North Carolina’s flat individual income tax rate will decrease from 4.99 to 4.75 percent for 2023 as a result of S.B. 105, the 2021 Appropriations Act, which was enacted in November 2021. Future scheduled reductions enacted under this same law will ultimately bring the rate to 3.99 percent in 2027 and phase out the corporate income tax entirely by 2030.
Starting in 2023, the law also simplifies the franchise tax, North Carolina’s capital stock tax, in a manner that will reduce franchise tax liability for many businesses. Specifically, instead of requiring businesses to calculate their franchise tax liability under three different bases and remit under the base that generates the highest tax liability, businesses will remit franchise taxes based solely on their North Carolina-apportioned net worth.
An inflation adjustment to North Carolina’s gas tax will take effect in January, increasing the tax from 38.5 to 40.5 cpg.  
Beginning January 1, 2023, taxpayers are required to add back on their state income tax forms expenses deducted at the federal level to the extent those expenses were paid for using forgiven Paycheck Protection Program (PPP) loans. The add-back was first enacted in 2020, but in 2021, its implementation was suspended until January 1, 2023.
With the enactment of H.B. 3418 in May 2022, Oklahoma became the first state in the nation to make permanent a 100 percent bonus depreciation allowance (“full expensing”) for qualifying investments in machinery and equipment. Many states allow corporations to fully deduct capital investments as part of their state’s conformity to the 2017 federal tax reform law, but the federal bonus depreciation allowance in Section 168(k) is scheduled to begin phasing down in 2023, with only 80 percent bonus depreciation allowed in 2023.
Separately, although marketplace facilitators were already responsible for collecting and remitting sales and use taxes on online sales in Oklahoma, they will be required to comply with any other local taxes levied on retail sales of tangible personal property in the state as of January 1, due to the enactment of S.B. 1339.
The enactment in July 2022 of H.B. 1342, part of the state’s FY 2022-23 budget, will reduce the corporate net income tax (CNIT) rate from 9.99 percent to 8.99 percent on January 1, 2023. Each year thereafter, the rate will decrease by 0.5 percentage points until it reaches 4.99 percent at the beginning of 2031. Further analysis of the CNIT rate cut can be found here.
Beginning January 1, taxpayers will be allowed to subtract any military service pension benefits included in federal adjusted gross income (AGI) when calculating their income for Rhode Island income tax purposes. Separately, taxpayers may soon exclude up to $20,000 of their federally taxable retirement income—including from pensions, annuities, and 401(k) plans—from the calculation of state taxable income, up from $15,000 in 2022.
These changes are the result of H. 7123, the budget for fiscal year 2023, which was enacted in June 2022. Other smaller tax changes taking effect in 2023 are detailed here.
South Dakota has a property tax assessment limit that freezes property assessments for qualifying South Dakota residents who are 65 or older or are disabled as defined by the Social Security Act. Beginning January 1, the property valuation limit will be adjusted for inflation in determining eligibility for the program.
Utah’s motor fuel (gasoline) and special fuel (diesel) tax rates, which are adjusted based on the three-year average price of fuel, will increase by 4.5 cents on January 1, 2023. The new rate for both gasoline and diesel will be 36.4 cents per gallon.
Starting January 1, Vermont’s throwback rule will be repealed, and the state will shift to using a single sales factor apportionment formula. At the same time, the state is expanding its corporate alternative minimum tax schedule, with a new top payment of $100,000 for companies with gross receipts greater than $300 million. These changes stem from the enactment of S.B. 53 in 2022.
Under the two-year budget enacted in June 2022, the Commonwealth’s 1.5 percent sales tax on groceries and certain personal hygiene products is repealed effective January 1, 2023. However, the 1 percent local sales tax will continue to apply to those purchases.
Separately, retired servicemembers ages 55 and older will be eligible to subtract up to $20,000 in military benefits when calculating taxable income in 2023, up from $10,000 in 2022. This amount is scheduled to increase to $30,000 in 2024 and $40,000 in 2025.
Washington residents may see price increases resulting from an increase in the state’s carbon emissions fee that was adopted as part of Initiative 1631, adopted by voters in 2018. Estimates of the increased cost to consumers vary widely.
On January 1, the maximum Business and Occupation (B&O) tax credit for small businesses will increase, with amounts dependent upon business classification.
Additionally, starting January 1, qualifying transfers of real property to be used for low-income housing will be exempt from the real estate excise tax (REET).
Effective January 1, 2023, Wisconsin will conform to the federal net capital loss deduction as a result of S.B. 339, enacted in March 2022. Under federal law, up to $3,000 in capital losses can be deducted against ordinary income annually, but Wisconsin currently limits its net capital loss deduction to $500.
Explore State Tax Policy Resources
1/3 Update: As originally published, this piece omitted a mention of Iowa’s corporate income tax rate reduction. It has been corrected.
Katherine Loughead
Senior Policy Analyst
Katherine Loughead is a Senior Policy Analyst with the Center for State Tax Policy at the Tax Foundation. Read more.
Janelle Fritts
Policy Analyst
Janelle Fritts is a Policy Analyst with the Tax Foundation’s Center for State Tax Policy. Before joining the team, she interned at the Mackinac Center for Public Policy, the Reason Foundation, and the Illinois Policy Institute. Read more.
Timothy Vermeer
Senior Policy Analyst
Timothy Vermeer is a Senior Policy Analyst with the Center for State Tax Policy at the Tax Foundation. He holds a master’s in public policy from Georgetown University’s McCourt School of Public Policy and a bachelor’s degree in political science and sociology from Calvin College. His research includes work on whether labor or capital bear the burden of states’ corporate income taxation. Read more.
Adam Hoffer
Director of Excise Tax Policy
Adam Hoffer is the Director of Excise Tax Policy at the Tax Foundation. Dr. Hoffer earned his PhD in Economics from West Virginia University and his undergraduate degree from Washington & Jefferson College. Read more.
A tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities.
An income tax is referred to as a “flat tax” when all taxable income is subject to the same tax rate, regardless of income level or assets.
A gas tax is commonly used to describe the variety of taxes levied on gasoline at both the federal and state levels, to provide funds for highway repair and maintenance, as well as for other government infrastructure projects. These taxes are levied in a few ways, including per-gallon excise taxes, excise taxes imposed on wholesalers, and general sales taxes that apply to the purchase of gasoline.
Inflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power.
The tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates.
A tax bracket is the range of incomes taxed at given rates, which typically differ depending on filing status. In a progressive individual or corporate income tax system, rates rise as income increases. There are seven federal individual income tax brackets; the federal corporate income tax system is flat.
A tax exemption excludes certain income, revenue, or even taxpayers from tax altogether. For example, nonprofits that fulfill certain requirements are granted tax-exempt status by the IRS, preventing them from having to pay income tax.
A tax deduction is a provision that reduces taxable income. A standard deduction is a single deduction at a fixed amount. Itemized deductions are popular among higher-income taxpayers who often have significant deductible expenses, such as state/local taxes paid, mortgage interest, and charitable contributions.
The standard deduction reduces a taxpayer’s taxable income by a set amount determined by the government. It was nearly doubled for all classes of filers by the 2017 Tax Cuts and Jobs Act as an incentive for taxpayers not to itemize deductions when filing their federal income taxes.
A sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding.
A property tax is primarily levied on immovable property like land and buildings, as well as on tangible personal property that is movable, like vehicles and equipment. Property taxes are the single largest source of state and local revenue in the U.S. and help fund schools, roads, police, and other services.
An excise tax is a tax imposed on a specific good or activity. Excise taxes are commonly levied on cigarettes, alcoholic beverages, soda, gasoline, insurance premiums, amusement activities, and betting, and typically make up a relatively small and volatile portion of state and local and, to a lesser extent, federal tax collections.
An inheritance tax is levied upon an individual’s estate at death or upon the assets transferred from the decedent’s estate to their heirs. Unlike estate taxes, inheritance tax exemptions apply to the size of the gift rather than the size of the estate.
Inflation indexing refers to automatic cost-of-living adjustments built into tax provisions to keep pace with inflation. Absent these adjustments, income taxes are subject to “bracket creep” and stealth increases on taxpayers, while excise taxes are vulnerable to erosion as taxes expressed in marginal dollars, rather than rates, slowly lose value.
Full expensing allows businesses to immediately deduct the full cost of certain investments in new or improved technology, equipment, or buildings. It alleviates a bias in the tax code and incentivizes companies to invest more, which, in the long run, raises worker productivity, boosts wages, and creates more jobs.
An individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S.
Depreciation is a measurement of the “useful life” of a business asset, such as machinery or a factory, to determine the multiyear period over which the cost of that asset can be deducted from taxable income. Instead of allowing businesses to deduct the cost of investments immediately (i.e., full expensing), depreciation requires deductions to be taken over time, reducing their value and discouraging investment.
A corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax.
Bonus depreciation allows firms to deduct a larger portion of certain “short-lived” investments in new or improved technology, equipment, or buildings, in the first year. Allowing businesses to write off more investments partially alleviates a bias in the tax code and incentivizes companies to invest more, which, in the long run, raises worker productivity, boosts wages, and creates more jobs.
Adjusted gross income (AGI) is a taxpayer’s total income minus certain “above-the-line” deductions. It is a broad measure that includes income from wages, salaries, interest, dividends, retirement income, Social Security benefits, capital gains, business, and other sources, and subtracts specific deductions.
A tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly.
Taxable income is the amount of income subject to tax, after deductions and exemptions. For both individuals and corporations, taxable income differs from—and is less than—gross income.
The Tax Foundation is the nation’s leading independent tax policy nonprofit. Since 1937, our principled research, insightful analysis, and engaged experts have informed smarter tax policy at the federal, state, and global levels. For over 80 years, our goal has remained the same: to improve lives through tax policies that lead to greater economic growth and opportunity.
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