Major State Tax Changes Coming in 2025: What Business Owners and High Earners Need to Know

Dylan Razzagone
Mar 5
4 min read

State Tax Changes in 2025: What You Need to Know

As 2025 approaches, significant shifts in state tax laws are on the horizon, impacting business owners, high earners, and remote workers alike. Some states are aggressively cutting taxes to attract businesses, while others are implementing tax hikes to generate revenue. Meanwhile, remote work tax enforcement is tightening, and pass-through entity tax (PTET) elections are expanding. Understanding these changes now will help taxpayers strategize and stay ahead of potential liabilities.

📈 States Cutting Income Taxes in 2025

A growing number of states are reducing individual and corporate income taxes, aiming to attract businesses and workers. These tax cuts are designed to foster economic growth and keep pace with competitive tax-friendly states like Texas and Florida.

🌟 North Carolina – Continuing its phased-in tax cuts, North Carolina will see further reductions in its flat income tax rate in 2025, making it one of the most business-friendly states in the Southeast.
🌟 Iowa – As part of a broader tax reform initiative, Iowa is gradually lowering its income tax rates, targeting a simplified tax structure that favors businesses and middle-income earners.
🌟 Kentucky – With its latest tax legislation, Kentucky is on track to reduce its individual income tax rate further, potentially bringing it below 4% by 2025.
🌟 West Virginia & Mississippi – These states are actively debating additional income tax cuts, which could phase out certain tax brackets over the next few years.

For business owners and high earners in these states, these reductions could result in substantial tax savings, making relocation or expansion within these jurisdictions more appealing.

🔥 States Increasing Taxes on High Earners

While some states are lowering taxes, others are taking the opposite approach—introducing new taxes or raising rates on higher-income individuals to address budget shortfalls.

💸 California – Lawmakers are considering a wealth tax that could affect residents with high net worth, even if they move out of the state. This follows prior tax increases on top earners in recent years.
💸 New York – The state extended its temporary tax hikes on high earners, with speculation that further increases could be introduced to address ongoing revenue concerns.
💸 Illinois – Facing significant pension liabilities, Illinois is evaluating adjustments to its tax structure that could result in higher tax burdens for high-income earners and businesses.
💸 Massachusetts – The state recently implemented a millionaire’s tax, adding an extra 4% levy on incomes exceeding $1 million. This policy is expected to continue shaping the state’s tax climate in 2025 and beyond.

For high earners in these states, proactive tax planning—such as considering residency changes or restructuring income sources—will be crucial to mitigate exposure to these tax increases.

💼 More States Adopting Pass-Through Entity Taxes (PTET)

With the federal SALT (State and Local Tax) deduction cap still in place, many states are expanding their Pass-Through Entity Tax (PTET) elections as a workaround for business owners. These elections allow S Corps and partnerships to pay state income taxes at the entity level, making the taxes deductible on federal returns.

New States Adopting PTET in 2025 – Several additional states are expected to roll out PTET elections, making it critical for pass-through business owners to explore whether opting in would reduce their overall tax liability.
Important Considerations – Not all PTET structures are the same, and states have varying rules on eligibility and tax treatment. Business owners should carefully analyze the potential benefits and drawbacks before making an election.

🌍 Remote Workers Face Stricter Residency Rules

The rise of remote work has led to increased tax scrutiny, as states attempt to collect income tax from individuals working across state lines. Tax authorities are cracking down on residency claims, focusing on individuals who maintain ties to their former home state while working remotely.

Aggressive States for Remote Worker Audits:

📍 New York – The state aggressively audits individuals who claim residency elsewhere while still earning income from New York sources. Those who spend substantial time in the state may still be deemed taxable residents.
📍 California – If you leave the state but continue doing business with California-based clients, you could still be subject to California taxation.
📍 Massachusetts & New Jersey – Both states are enforcing nonresident tax rules for employees working remotely for in-state companies.

Taxpayer Tip: If you’ve relocated but still earn income from your former state, consult a tax professional to ensure compliance and avoid unexpected tax bills.

🏢 Property and Sales Tax Increases on the Horizon

With many states cutting income taxes, they are looking at alternative revenue sources, leading to increases in property taxes and sales taxes:

Some states and municipalities have proposed raising property tax rates to offset income tax cuts.
Several states are broadening their sales tax base to include digital goods, subscriptions, and services that were previously untaxed.

For business owners, these shifts could impact operating costs and consumer spending behaviors. Staying ahead of these changes will be critical in pricing and financial planning.

⚖️ Estate Tax and Inheritance Tax Adjustments

A few states are considering changes to estate and inheritance taxes, which could impact high-net-worth individuals engaging in estate planning.

Some states are lowering the exemption threshold, meaning more estates will be subject to taxation.
Others are revisiting their estate tax rates, potentially increasing tax burdens on inherited wealth.

If estate planning is a key concern for you or your business, it’s crucial to revisit strategies to minimize estate tax liabilities in 2025.

📉 What Business Owners and High Earners Should Do Now

🔍 Review Your State’s Tax Changes – Check whether your state is increasing or decreasing rates and how it will impact your tax burden.
🏠 Consider Residency Planning – If you’re considering relocating, weigh the tax advantages of different states before making a move.
📈 Optimize Business Tax Elections – If your state is offering a new or improved PTET election, speak with a tax advisor about whether it makes sense for your business.
📜 Prepare for Audit Risk – Remote workers and high-income earners should keep detailed records to support their residency claims and deductions.
📊 Monitor Additional Legislative Changes – Some of these proposals are still in progress, so staying informed will be key.

🚀 Final Thoughts

The tax landscape is rapidly evolving, and 2025 will bring major state-level tax changes. Business owners, high earners, and remote workers should take proactive steps to reduce tax burdens and comply with new regulations. If you need guidance, consulting a tax professional can help ensure you’re making the most tax-efficient choices possible.