THIS IS A WORK IN PROGRESS. PLEASE BE PATIENT. AND PLEASE CONTRIBUTE IF YOU KNOW OF MORE EXAMPLES! See *update log* at the bottom for details.

Most of us are subject to several set of tax rules (income and otherwise!). The biggest two, however, are the Federal Income Tax — and, if you live in one of the states which taxes income (which is most of them) — your State Income Tax. (Similarly, there are differences in gift and estate taxes between federal and state governments, too.)

But these rules do differ. Our goal here is to create two lists, or two versions of the same list — first, by state, and second by tax area. For example, neither Massachusetts nor New Jersey allow you to deduct IRA contributions, even if you can deduct them on your federal income taxes. So we’ll include “No IRA Deductions” in the sections for each of MA and NJ. And additionally, we’ll have a section later indicating “IRA Deductions” and listing MA and NJ as two places where they aren’t allowed. But we’ll start on a state-by-state basis and hope to add the cross-wise version of this list later. (Ideally, this would be a database, but for the moment, we’re just putting together this blog post. Again, please be patient and contribute if you can!)

Also, please note that this things may change over time. Every time tax laws change — which is all the time — differences may be introduced. The 2017 TCJA introduced a lot of such changes, for example. This will likely always be a work in progress and should NOT be counted on as definitive — your situation is unique and you absolutely should review it with a professional — possibly your accountant — who is fully up-to-date on both the federal rules and your state’s.

Very little of this applies to the nine states which don’t have an income tax to begin with: AK, FL, NV, NH, SD, TN, WA (though WA does tax some LTCGs), and WY.

California

• No deduction for HSA contributions
• 529 distributions used for K-12 are not qualified distributions — and may be subject to taxes and penalties
• Miscellaneous deductions are still permitted for folks who itemize (ie. investment advisor fees, unreimbursed work expenses)
• No gift or estate tax
• No income taxes on Social Security, even if your SS is taxable federally
• Capital gains and dividends are taxed the same as any other income – unlike federal rules, they do not get a different (lower) set of tax rates
• Mortgage interest deduction is still limited to the first $1million in CA, while the federal deduction is capped at the first $750k of mortgage.
• SALT — while, of course, state income taxes are not deductible on your state income taxes… CA has an unlimited state income tax deduction for your property taxes. The federal government’s $10k cap has been in place on the combination of state and local and property taxes since the 2017 TCJA, but this appears to be about to change with the upcoming 2025 federal tax rule changes.
• 529->Roth IRA rollovers (part of Secure 2.0) — are not considered “qualified distributions” in California. They may not incur federal taxes or penalties — but they will incur California income taxes and penalties (additional 2.5% on any earnings).
• California does not recognize federally Qualified Small Business Stock (section 1202) capital gains exclusions. Even if your cap gains are entirely excluded federally, you’ll owe CA income taxes on them (and CA doesn’t have a preferential cap gains rate to begin with — full ordinary CA rates.)

Colorado

• If you have rental property, even if you owe no taxes, you must file a state tax return anyway to track depreciation.
• Flat income tax, no standard deduction at all, with an “addback” for filers whose federal AGI exceeds a certain limit.
• CO income tax deduction for 529 contributions to any state’s 529.
• CO does tax SS benefits — but there’s a deduction for any SS benefits on which federal income taxes are paid.
• No inheritence or estate tax.
• Veterans may be exempt from CO income taxes on some military pensions

Massachusetts

• Traditional IRA contributions are not deductible even if they are deductible on your federal income taxes. But you accumulate MA “basis” and will not pay MA taxes again on that portion.
• Social Security not taxed. Pensions from certain MA government entities may be exempt from MA tax even if taxed federally.

New Jersey

• No deduction for IRA contributions — IRA contributions create state-specific “basis” in your IRA — and when the money comes back out later, you need to apply a pro-rata rule separately for the state from the federal one.
  Additionally — and NJ is especially odd in this — US Treasury interest *inside the IRA* is also not taxed — inasmuch as you may add such interest, as it accumulates, to your NJ state-specific “basis”. As far as we know, this is the only place where the type of interest *inside* an IRA is treated differently from anything else in the IRA. If anyone know of any other similar exception, please share! This is particularly odd.

Oregon

• Oregon has a NJ-like exemption for the portion of the IRA which represents accumulated treasury income. It accumulates and when you take a distribution, it’s exempt on a pro-rata basis. Ie. it effectively increases your OR basis similarly. (Oregon Pub 17, 2024 edition, page 87)

Pennsylvania

• No standard deduction or exemption. Itemized deductions are a bit different.
• No state income tax deduction for 401k contributions — but you accumulate state “basis” (like NJ’s IRA) and when you take distributions, there’s a state tax benefit.
• No tax on Social Security benefits or any of several other pensions or retirement plans
• No carry-forward of capital losses. And capital losses may not offset ordinary income at all. (Federal capital losses offset capital gains and any excess loss is carried forward, with up to $3k offsetting ordinary income.)
• Spouses capital gains and losses may no offset each other. (ie. one spouse has a capital loss and the other spouse has a capital gain — federally, they cancel each other out. In PA, not so much.)
• Bargain element of ISOs — treated as ordinary income at exercise (effectively the same as Federal AMT treats it — presumably giving you a PA “basis” in the stock the same as your Federal AMT “basis” and different from your Federal *regular* basis). (Thanks to Jamie Clark, via LinkedIn!)

Washington State

• Long-term capital gains taxed above an exemption amount (“standard deduction” of $270,000 — above which taxed in tiers, starting at 7% and going up again at $1million). Doesn’t apply to real estate, certain family-owned businesses, livestock, and a couple of other exceptions. Short-term capital gains not taxed at all! Very strange incentive structure here… (also thanks to Jamie Clark, with additional details added via a the WA DOR website.)

States with NO State Income Tax

Nine states: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming have no state income tax at all. New Hampshire used to exempt W2 (earned) income, but as of 1/1/2025, no longer taxes interest or dividend income either, so it’s now the ninth no-income-tax state. Tennessee similarly phased out taxation on interest and dividends and ended it in 2021.

Community Property vs Separate Property (Common Law) States

While not as specific as income tax issues, states vary in whether they have community property available as a form of ownership for married couples or not. This can have a significant impact on step-up basis when an owner dies, as well as in other contexts.

Community Property states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.

Separate Property (Common Law) states: The other 41!

Optional CP — several non-CP states allow married couples to opt into to CP treatment for certain assets (varies by state, but, for example, it may require the use of a trust) — these include: Alaska, Florida, Kentucky, South Dakota, and Tennessee.

Secure Act 2.0’s 529->Roth IRA Rollovers

As noted above, CA has not adopted the ability to make a tax-free rollover from a 529 to a Roth IRA. Any such rollovers will be treated in CA as non-qualified distributions subjecting earnings to income taxes and penalties.

Other states treat these in different ways, too. In many states, one may have gotten a state income tax deduction for making 529 contribution (not CA, of course). Of those, 7 states (IN, LA, MA, MI, MN, UT, and VT — and DC) have indicated that if you do the 529->Roth conversion, they may “recapture” the state income tax deduction you took for making the contributions in the first place. That’s separate from the issue of taxing (and/or penalizing) earnings.

Most states (30 of the ones which have state income taxes) have said they will follow federal law (including those doing the “recapture” noted above).

As of Sept 17, 2025, three states still haven’t yet made a decision on how they are going to treat this: CO, MO, and NJ. (Don’t count much on NJ — which gets a special raspberry for how it treats IRAs to begin with.)

Disclaimer and Thank You

Again, we cannot reiterate often enough that this is intended as general information and is all subject to change and that you should check with a professional who knows current rules for both federal and your own state. And we’d like to thank folks who’ve helped make suggestions about things to add here, while noting that if there are any errors, again, we apologize, and will try to fix as we can and that those we are acknowledging here are certainly not responsible for them! Thanks to Becky Prior Noss!

Update Log

• 10/13/2025 regarding 529->Roth rollovers
• 10/24/2025 re: treasury interest inside IRAs in NJ.
• 11/04/2025 QSBS in CA