State Taxes on Investment Income: A State-by-State Guide

How States Tax Investment Income

Unlike the federal government, which maintains a separate, lower rate structure for long-term capital gains and qualified dividends, most states treat all income — wages, interest, dividends, and capital gains — the same way. The majority of states with a broad income tax apply their ordinary income tax rate to investment income without distinction.

State income taxes on investment income generally apply to:

• Capital gains — both short-term and long-term, in most states taxed at the same ordinary rate
• Dividends — including both qualified and ordinary dividends (most states do not replicate the federal qualified dividend preference)
• Interest income — from bank accounts, bonds, and other debt instruments (subject to certain exemptions for US government obligations)
• Rental income — from real property located in the state or owned by a state resident
• Pass-through income — from partnerships, S corporations, and LLCs that flow to individual investors

State income taxes are generally not deductible in computing your federal adjusted gross income (though a limited federal deduction for state and local taxes — capped at $10,000 per year under current law — may be available to itemizers). This means state and federal tax obligations layer on top of each other for most investors.

For the full picture of federal capital gains tax rates and calculations, see our companion article on Capital Gains Tax on Stocks.

The Nine States With No Broad Income Tax

Nine states currently impose no broad-based state income tax, meaning capital gains, dividends, and interest earned by residents are generally not subject to state-level income tax on investment income:

Residents of these states still pay federal capital gains tax at the same rates as all other Americans. The absence of state income tax means the combined federal-plus-state rate is simply equal to the federal rate alone. For a high-income investor realizing long-term gains at the 20% federal rate plus 3.8% NIIT, living in a no-income-tax state results in a combined 23.8% rate — compared to as much as 37.1% for a comparable investor in California (20% + 3.8% + 13.3%).

It is worth noting that no-income-tax status does not mean no taxes of any kind. States that forgo income taxes typically rely more heavily on property taxes, sales taxes, or excise taxes to fund government services. The overall state tax burden varies significantly by state regardless of income tax policy.

High-Tax States for Investors

At the other end of the spectrum, several states impose top marginal income tax rates — which generally apply to investment income as well — that meaningfully increase an investor's combined tax burden.

California — 13.3%

California has the highest top marginal state income tax rate in the nation at 13.3% (which includes a 1% mental health services surtax on income above $1 million). Critically, California does not provide a preferential rate for long-term capital gains — all capital gains are taxed as ordinary income at the same rates as wages. For a single filer in California with taxable income above $1 million realizing long-term capital gains, the combined federal and state capital gains rate can exceed 37% (20% federal + 3.8% NIIT + 13.3% state).

New York — 10.9%

New York imposes a top state income tax rate of 10.9% on income above $25 million (the rate is 9.65% from $2.155 million to $25 million for single filers). New York City residents pay an additional New York City income tax of up to approximately 3.876%, bringing the combined state-plus-city rate to roughly 14.776% for high earners in the city. Like California, New York does not offer a lower rate for long-term capital gains.

New Jersey — 10.75%

New Jersey's top marginal rate of 10.75% applies to income over $1 million. New Jersey taxes capital gains as ordinary income and offers only a modest exclusion for gains on certain NJ small business stock. The state also taxes most retirement income, though it provides partial exclusions for pension and retirement plan distributions that phase out at higher income levels.

Oregon — 9.9%

Oregon taxes all income, including capital gains, at up to 9.9%. The state has no sales tax, meaning income and property taxes carry a larger share of the revenue burden. Oregon does not offer a preferential long-term capital gains rate.

Minnesota — 9.85%

Minnesota's top rate of 9.85% applies to all income types without a capital gains preference. Minnesota also taxes Social Security benefits for higher-income residents, unlike many other states.

States With Preferential Capital Gains Tax Rates

A minority of states offer a lower tax rate on long-term capital gains compared to ordinary income, partially mirroring the federal approach. These states recognize a policy rationale for taxing gains at preferential rates to encourage investment and account for the impact of inflation on asset values.

Notable examples include:

• Wisconsin — Excludes 30% of long-term capital gains from Wisconsin income, effectively reducing the top state rate on long-term gains.
• Montana — Offers a 2% capital gains credit on qualifying gains, reducing the effective rate on long-term gains below the ordinary income rate.
• South Carolina — Allows a 44% deduction on long-term capital gains, effectively taxing net long-term gains at roughly half the ordinary income rate.
• North Dakota — Provides a deduction of 40% of net long-term capital gains from federal sources, significantly reducing the effective rate.
• New Mexico — Allows a deduction of up to $1,000 of net capital gains, a more modest preference.
• Arizona — Provides a 25% long-term capital gains deduction for gains on investments held more than one year.

State tax provisions change regularly through legislative action. The rules above reflect general provisions as commonly reported; always verify current state law with a qualified tax professional or directly with your state's department of revenue.

State Tax on Retirement Income

Investment-related income in retirement — including distributions from traditional IRAs, 401(k) plans, and pensions — is treated very differently across states. The variation is substantial enough to be a significant factor for retirees when considering where to live.

The broad categories of state treatment include:

• No income tax states (AK, FL, NV, SD, TN, TX, WY) — no state tax on retirement income of any kind.
• States that exempt all retirement income — including Mississippi, which exempts all income from qualified retirement accounts, and Pennsylvania, which generally exempts retirement income after reaching retirement age.
• States with partial exemptions — many states exempt a portion of pension or retirement income, often with income phase-outs. Illinois exempts retirement income from qualified plans entirely for those over a qualifying age. New York exempts up to $20,000 of pension income per year from most retirement plans.
• States that fully tax retirement income — including California, which fully taxes IRA and 401(k) distributions at ordinary income rates with no retirement income exemption.

Roth accounts present a separate consideration. Qualified distributions from Roth IRAs and Roth 401(k)s are generally tax-free at the federal level and in most states, since Roth contributions are made with after-tax dollars and qualified distributions are not includable in income.

Social Security benefits are taxed differently as well. At the federal level, up to 85% of Social Security benefits can be included in taxable income for higher earners. At the state level, the majority of states do not tax Social Security benefits at all — including many states that otherwise have robust income taxes. States that do tax Social Security benefits include Minnesota, Nebraska (though phasing out), Rhode Island, and Vermont.

Municipal Bond State Tax Exemption

Municipal bonds — debt instruments issued by state governments, cities, counties, school districts, and other local entities — carry a significant tax advantage: interest income is generally exempt from federal income tax. The state-level treatment, however, depends on which state issued the bond and where the bondholder resides.

In-State Bonds

Most states exempt the interest from their own municipal bonds (and those of their political subdivisions) from state income tax. A California resident holding a California general obligation bond generally owes no federal or California income tax on the interest. This double tax exemption — federal and state — makes in-state municipal bonds particularly attractive to investors in high-tax states, often resulting in a significantly higher after-tax yield compared to taxable bonds with similar credit quality and maturity.

Out-of-State Bonds

Interest from municipal bonds issued by other states is generally exempt from federal income tax but is typically subject to income tax in your state of residence. A California resident holding a New York City bond would owe no federal tax on the interest but would owe California state income tax on it.

A small number of states — including Indiana, Utah, and Wisconsin — provide a state tax exemption for all municipal bond interest regardless of the issuing state, though the exact rules vary. Conversely, some states (including Illinois and Wisconsin for certain bond types) tax even their own municipal bond interest under specific circumstances.

US Government Obligations

Interest from US Treasury securities (bills, notes, bonds) and certain US government agency securities is exempt from state and local income taxes by federal law. This exemption applies in all states and can make Treasury securities relatively more attractive on an after-tax basis for investors in high-tax states compared to taxable corporate bonds. US savings bond interest follows the same rule.

Residency Rules and Domicile

Understanding which state has the right to tax your investment income requires understanding two related but distinct legal concepts: domicile and statutory residency.

Domicile

Your domicile is your permanent legal home — the place you consider your true, fixed, and permanent place of abode, and to which you intend to return whenever you are away. You can have only one domicile at a time. States use domicile to determine tax obligations on all income regardless of source or where it was earned.

Establishing a new domicile in a different (typically lower-tax) state requires more than renting an apartment or filing a change of address form. Tax authorities evaluating claimed domicile changes look at a range of factors, including:

• Where you spend the most time (and documentation via calendars, travel records)
• Location of your primary residence and personal belongings
• Where your vehicles are registered and your driver's license is issued
• Where you are registered to vote
• Location of your primary bank accounts and financial advisors
• Location of your doctors, dentists, religious organizations, and clubs
• Location of your business interests and employment
• Where your will and estate plan are executed

Statutory Residency

Separate from domicile, many states impose income tax on statutory residents — individuals who may be domiciled elsewhere but who maintain a permanent place of abode in the state and spend more than a threshold number of days there, typically more than 183 days in a calendar year.

New York is well-known for aggressively applying its statutory residency rules. A person domiciled in Florida who maintains a Manhattan apartment and spends more than 183 days in New York can be treated as a New York statutory resident and taxed on their worldwide income — including all investment income — even if they consider Florida their permanent home.

Part-Year Residents and Nonresidents

When you move during the year, most states require you to file as a part-year resident. Your investment income is generally allocated between states based on your period of residency in each. For nonresidents who own real property or business interests in a state, income attributable to those in-state sources may be taxable in that state even if you reside elsewhere. Capital gains on real property are typically sourced to the state where the property is located.

State Tax Planning Considerations

Understanding state tax rules is the first step toward informed decision-making as an investor. The following are general educational observations — not personalized tax advice. Always consult a qualified tax professional for guidance specific to your situation.

Timing of Gain Realization

Because most states do not distinguish between short-term and long-term capital gains, the federal one-year holding period threshold drives most timing considerations. However, some investors in states with graduated rate structures consider timing large realizations to avoid pushing income into higher state brackets, in much the same way they manage federal income brackets.

Tax-Advantaged Account Utilization

Many states follow the federal treatment of traditional and Roth IRAs, 401(k) plans, and 529 college savings plans, making contributions to these accounts valuable at both the federal and state level. Some states provide additional state income tax deductions for 529 contributions beyond the federal treatment. Holding income-generating investments inside tax-deferred or tax-exempt accounts can reduce both federal and state tax obligations.

Municipal Bond Allocation

For taxable accounts in high-tax states, in-state municipal bonds can provide interest income exempt from both federal and state taxes. Whether this makes a specific bond an attractive holding depends on comparing its tax-equivalent yield to that of taxable alternatives, accounting for your specific marginal rates. Use our Capital Gains Tax Calculator alongside a tax-equivalent yield formula to understand after-tax returns more precisely.

Understanding the Full Picture Before Relocating

Moving to a no-income-tax state is sometimes cited as a tax reduction measure. Investors evaluating such a move benefit from understanding the full picture: property taxes, sales taxes, cost of living, estate taxes (which vary by state), and the complexities of establishing a valid change of domicile. Understanding the tax concepts — covered throughout this article — is an important foundation for those discussions, and a qualified tax and financial professional can provide state-specific analysis. Learn more about investment income concepts in our Investment and Tax Glossary.

50-State Rate Reference Table

The table below provides approximate top marginal state income tax rates and general notes on investment income treatment. Rates reflect commonly cited figures for the 2025 tax year and are subject to change. Many states have multiple brackets; the top rate shown applies only at or above the listed threshold. Always verify current rates with your state revenue department or a qualified tax professional.

LT = long-term capital gains. Rates are approximate top marginal figures for the 2025 tax year and do not represent effective rates for all income levels. Many states have multiple brackets with lower rates at lower income levels. Verify current rates at your state department of revenue website or with a qualified tax professional.

Frequently Asked Questions