About 45 years have passed since a U.S. state last eliminated its income tax on wages and salaries. But with recent actions in Mississippi and Kentucky, two states now are on a path to do so, if their economies keep growing.
The push to zero out the income tax is perhaps the most aggressive example of a tax-cutting trend that swept across states as they rebounded from the COVID-19 pandemic with surging revenues and historic surpluses.
The Kentucky state Capitol is seen April 7, 2021, in Frankfort, Ky.
But it comes during a time of greater uncertainty for states, as they wait to see whether President Donald Trump's cost cutting and tariffs lead to a reduction in federal funding for states and a downturn in the overall economy.
Some fiscal analysts also warn the repeal of income taxes could leave states reliant on other levies, such as sales taxes, that disproportionately affect the poor.
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The 16th Amendment to the U.S. Constitution grants Congress the power to levy income taxes. It was ratified by states in 1913. Since then, most states have adopted their own income taxes.
Eight states currently charge no personal income tax: Alaska, Florida, New Hampshire, Nevada, South Dakota, Tennessee, Texas and Wyoming. A ninth state, Washington, charges no personal income tax on wages and salaries but does tax certain capital gains income over $270,000.
When Alaska repealed its personal income tax in 1980, it did so because state coffers were overflowing with billions of dollars in oil money.
Though income tax eliminations have been proposed elsewhere, they have not been successful.
“It’s a lot easier to go without an individual income tax if you’ve never levied one," said Katherine Loughead, a senior analyst and research manager at the nonprofit Tax Foundation. "But once you become dependent on that revenue, it is a lot more difficult to phase out or eliminate that tax.â€
Republican Mississippi Gov. Tate Reeves recently signed a law gradually reducing the state's income tax rate from 4% to 3% by 2030 and setting state revenue growth benchmarks that could trigger additional incremental cuts until the tax is eliminated. The law also reduces the sales tax on groceries and raises the gasoline tax.
Northern District Public Service Commissioner Brandon Presley, the Democratic nominee for Mississippi governor, gives a news conference, June 22, 2023, at a locally owned clothing store in Jackson, Miss.Â
If cash reserves are fully funded and revenue triggers are met each year, Mississippi's income tax could be gone by 2040.
Supporters of an income tax repeal hope it will attract both businesses and residents, elevating the state’s economy to the likes of Florida, Tennessee and Texas. Their theory is that when people pay less in income taxes, they have more money to spend, thus boosting sales tax collections.
The tax repeal “puts us in a rare class of elite, competitive states,†Reeves said in a statement. He added, “Mississippi has the potential to be a magnet for opportunity, for investment, for talent — and for families looking to build a better life.â€
Mississippi is among the most impoverished states and relies heavily on federal funding. Democratic lawmakers warned the state could face a financial crisis if cuts in federal funding come at the same time as state income tax reductions.
The income tax provides “a huge percentage of what the state brings in to fund things like schools and health care and services that everybody relies on,†said Neva Butkus, senior analyst at the nonprofit Institute on Taxation and Economic Policy.
A 2022 Kentucky law reduced the state's income tax rate and set a series of revenue-based triggers that could gradually lower the tax to zero. But unlike in Mississippi, the triggers aren't automatic. Rather, the Kentucky General Assembly must approve each additional decrease in the tax rate.
That has led to a series of tax-cutting measures, including two new laws this year. One implements the next tax rate reduction from 4% to 3.5% starting in 2026. The second makes it easier to continue cutting the tax rate in the future by allowing smaller incremental reductions if revenue growth isn't sufficient to trigger a 0.5 percentage point reduction.
Democratic Gov. Andy Beshear signed the legislation for next year's tax cut but let the other measure passed by the Republican-led legislature become law without his signature. Beshear called it a “bait-and-switch†bill, contending lawmakers had assured the guardrails for income tax reductions would remain in place while pushing for the 2026 tax cut, then later in the session altered the triggers for future years.
New Hampshire and Tennessee already did not tax income from wages and salaries, but both states had taxed certain types of income.
In 2021, Tennessee ended an income tax on interest from bonds and stock dividends that had been levied since 1929.
New Hampshire halted its tax on interest and dividends at the start of this year.
Some other states also are pushing to repeal income taxes. The Oklahoma House passed legislation in March that would gradually cut the personal income tax rate to zero if revenue growth benchmarks are met. That bill now is in the Senate.
New Missouri Gov. Mike Kehoe, a Republican, also wants to phase out the income tax. The House and Senate have advanced legislation that would take an incremental step by exempting capital gains income from taxes.
16 last-minute 1099 tax deductions for independent contractors
16 last-minute 1099 tax deductions for independent contractors
Unlike a full-time employee whose taxes are deducted from their paycheck, if you're an independent contractor, it's your job to pay taxes on your own—and you'll want as many 1099 tax deductions as you can take, explains.
You can claim numerous deductions when you file your taxes on . Your 1099 independent contractor deductions lower the amount you'll ultimately have to pay in taxes as a self-employed contractor.
"Not keeping good track of their business expenses is one of the biggest mistakes a freelancer can make," says Matthieu Silberstein, VP of Creative Marketing at Lili, a banking app designed for freelancers.
"You can save hundreds—if not thousands—of dollars by separating and writing off purchases you make for your business. On average, it takes our customers less than 30 minutes per month to sort their business expenses and Lili auto-generates a report every quarter—so 30 minutes of 'work' to keep an extra $500 in the bank makes a pretty decent hourly rate."
1. Home office costs
Depending on your profession, you may have significant . For example, maybe you use your home as an office, a yoga studio, a place to store expensive equipment or something else altogether.
Do you use your home office space only for work, and is it your primary place of business? If so, there are multiple options for calculating your independent contractor tax deductions in this category.
There are direct expenses to consider, like renovations and a paint job, and indirect expenses, like insurance, utilities, and home repairs. Homeowners can also write off portions of their property taxes and mortgage interest.
So, how much can you write off for a home office? The most straightforward calculation with the IRS is $5 per square foot up to 300 square feet, which would be a maximum write-off of $1,500.
Don't forget to write off office supplies as part of your home office deductions. These include computers, printers, work-related software, pens, paper, postage, shipping and more. You can deduct these as long as you used them for business purposes the year you purchased them. Â
2. Educational expenses
Continuing education can be an important factor in growing a business and attracting new clients.
Educational expenses are potentially tax-deductible. For instance, webinars, virtual conferences, business-related books and subscriptions to professional publications are all eligible as potential deductibles when you file your taxes.
3. Business insurance premiums
provides important coverage to protect you from unexpected expenses related to accidents or business mistakes. For example, a can help cover expenses if a client accuses you of missing a deadline or making a mistake that costs them money.
, you can if it's "ordinary" and "normal" for your business and industry. These aren't just insurance types that are legally required, either. Here are some examples of types of business insurance that you can deduct from your tax return:
- : This can help protect your business if you are legally responsible for bodily injuries or property damage.
- : Also known as , this type can protect you from professional accusations of negligence from business errors.
-  can help protect your store or office space from damage caused by fire, theft, and other perils. It also includes inventory and equipment.Â
- : This can cover you if your business operations are interrupted by a natural disaster.Â
- : Getting separate insurance for a commercial vehicle is tax deductible, but you can only claim commercial auto or gas mileage as a deduction. (So you may want to do the math.)
- Self-employed health insurance: You can claim self-employed health insurance on your tax deductions for yourself and your family.Â
These deductions will vary based on your industry. For example, a personal trainer may have professional liability insurance to cover injury-related damages. In many states, there is no legal requirement to have this policy, but the IRS still considers it ordinary and normal to have this insurance in the fitness industry.Â
You can include your expenses for business insurance coverage in your 1099 tax deductions.
Get a quick estimate on how much business insurance could cost your business with these insurance calculators:
4. Depreciation of property and equipment
As an independent contractor, you likely purchased property and equipment for your business. Over time, those items lose value. For example, a printer you bought three years ago is worth less now than when you bought it. That's called depreciation.
, if business purchases will last you more than a year, you can write off the depreciation of their value on your tax return. You can potentially deduct repairs on property used for your business as well.
5. Car expenses
If you spend time going from job to job, making deliveries or other business tasks, sometimes your vehicle can feel like your office. Luckily, car expenses and mileage can be one of the largest tax write-offs for entrepreneurs.
The IRS standard mileage rate for tax deductions is typically near 65.5 cents per mile. The rules for calculating the rate are updated every tax year, so .
Tolls and parking expenses are also deductible. For extended meetings or projects, these can add up to a significant out-of-pocket expense for an independent contractor. Keep your receipts, and add them to your 1099.
At this point, you might be asking, "Can I write off my car payment?" Unfortunately, the answer from the IRS is no.
If you are purchasing a car exclusively for business use, you can potentially deduct some . Just be prepared for extra IRS scrutiny since 1099 workers rarely have a business-only vehicle.
6. Business travel
Do you have client meetings out of state or attend industry conferences? When it comes to business trips, your airfare, hotel costs, taxis (including rideshare services like Uber) and 50% of your meal costs can be written off as business expenses.
Even if you extend your trip to travel after the business commitments have ended, you can include those travel expenses. Just make sure that the number of leisure days on the trip doesn't exceed the total business days.
For example, if you fly from California to Paris for a three-day photography conference, you may want to extend your trip for two days of touring. 50% of the costs of meals and accommodations for the extra two days can be deducted, just like the first three days.
7. Cell phone and internet bills
Do you have a cell phone or an internet connection that you use for both personal use and business? If so, you can write off a portion of your monthly internet and cell phone bill. Similar to your home office, you'll want to determine what percentage of your phone and online usage is business vs. personal. You can then deduct that percentage of your bills at tax time.
8. Health insurance and medical expenses
100% of your health insurance is one of the many deductible business expenses for independent contractors to include on your 1099. You can deduct medical, dental and vision .
In addition to health insurance premiums, you can write off expenses such as glasses, nonprescription medications and visits to the chiropractor. There may be benefits for your spouse as well.
9. Retirement savings
If you contribute to an individual retirement account (IRA), you may be able to make a tax deduction on those contributions. There are some caveats though.
First, you may need to reduce or eliminate the deduction if you or your spouse contributes to an employee-sponsored retirement plan such as a 401(k) or 403(b).
You also can't take the deduction if your exceeds yearly limits.
10. Bank fees and business interest
If you got a loan from a bank to fund your business, you may deduct the interest as a business expense. If your loan was used for both business and personal expenses, you need to track how much of it went to your business and only deduct the interest from that portion.Â
You can also deduct business-related banking fees and charges. For example, paying for replacement checks, monthly service charges, and lost card fees. These charges add up as many traditional banking institutions often nickel and dime you.
Similarly, you may write-off the interest from a business credit card, and any associated costs like annual fees. By the way, you don't need to have a business credit card to deduct qualifying interest. If you have a personal card used exclusively for business expenses, you can still deduct.
11. Startup costs
If you got your business up and running this year, you can claim deductions for many of the associated expenses—up to $5,000. These related expenses include, registering for a website domain, travel for scouting business locations, market research, and training staff.Â
If you set up an for your business, you can deduct an additional $5,000.
However, buying equipment or vehicles aren't considered startup costs. You can deduct them in a few years as they depreciate in value.Â
12. Advertising fees
Spending money to advertise your business can mean more write-offs. Expenses include both digital and physical advertising costs.
From business cards to flyers. Facebook or LinkedIn ads. A billboard, a TV commercial, or radio spot. Website design and maintenance. They all qualify as advertising expenses.
13. Consulting and professional service fees
When you're a business owner, you may need extra help from people who specialize in different areas.Â
For example, you may need to to get a legal question answered. You may ask an accountant for help in managing your books or a financial advisor to help you define long term goals.Â
Whatever the case, if the fees are a necessary expense related to operating your business, write them off.
14. Self employment taxes
When filling out your tax form as a self-employed worker, can be something of a shock. That's because you're paying both the employer and employee sides of Social Security tax and Medicare taxes—that's a tax rate of 15.3% of net earnings.
The IRS knows this isn't fair, so they allow you to deduct half of your self-employment tax.Â
While it won't reduce the actual amount of self-employment tax you need to pay, it can reduce your income tax. (Self-employment tax and income tax aren't the same thing.)
15. The qualified business income (QBI) deduction
Good news: The allows eligible self-employed people to deduct a portion of their business income.Â
allows people with "pass-through income"—business income reported on personal tax returns—to deduct up to 20% of their business income.
There are limitations though. To qualify for the deduction, as of 2020, your total taxable income must be below $163,300 for individuals and $326,600 for married couples filing jointly.
16. Tax advice service expenses
There are many benefits to being a self-employed contractor, and a qualified tax advisor can help you optimize your strategy when filing your 1099 independent contractor income tax deductions.
While may seem like an unnecessary cost, the tax preparation they provide may save you valuable time. Preparers can help you with your itemized deductions, figure out your actual expenses, and ensure you're claiming all the available tax breaks you can.
Even better—you can write off their fees as a business expense.
Tax deductions vs. tax credits
There's a difference between tax deductions and tax credits.
- Tax deductions. A tax deduction lowers how much of your income is taxable. How much a tax deduction saves you depends on your .
- Tax credits: A tax credit directly decreases the amount of tax you owe. It gives you a dollar-for-dollar reduction of the income tax you owe.
Both will reduce your tax bill, but the tax credit is slightly better due to the dollar-for-dollar reduction.
NEXT Insurance does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors for personalized guidance.
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