State Income Tax
Automatic state income tax projection using effective rates, with exemptions for Social Security, retirement income, and federal/government pensions.
How it works
Stratum calculates state income tax year-by-year using a flat effective rate applied to a modified version of federal AGI. When a state is selected in the Assumptions Panel, the rate and exemption flags are pre-populated from the state profile library. Advisors can override any value. State income tax is automatically added to the SALT deduction bucket and is subject to the SALT cap.
1. Select State and Rate
Choose a state in the Assumptions Panel to auto-populate the effective tax rate and exemption flags. The rate can be manually overridden.
Effective State Rate = State Profile Rate (default) OR Advisor Override
Example: California: 7.2% default. Advisor adjusts to 9.3% for high-income client.2. Start with Federal AGI
State taxable income begins at Adjusted Gross Income. Federal itemized deductions do not reduce state taxable income.
State Taxable Income (pre-exemptions) = Federal AGI
Example: $180,000 AGI yields $180,000 starting state taxable income.3. Apply Social Security Exemption (if applicable)
Many states exempt some or all Social Security benefits. If enabled, the taxable portion of SS is subtracted from state taxable income.
State Taxable Income = AGI - Taxable Social Security (if exempt)
Example: Colorado client: $28,000 taxable SS removed from $180,000 AGI = $152,000.4. Apply Retirement Income Exemption (if applicable)
Some states exempt all IRA distributions and pension income. If enabled, income of type ira-distributions and pensions is subtracted.
State Taxable Income = Prior - (IRA Distributions + Pension Income) (if exempt)
Example: Pennsylvania client (broader exemption on): $40,000 IRA + $12,000 pension removed from $152,000 = $100,000 state taxable income.5. Apply Federal Pension Exemption (if applicable)
Some states exempt only federal, military, and state-government pensions while still taxing private-employer pensions. Enable Exempt federal pensions in the Assumptions panel to activate this third exemption. This step is SKIPPED when Exempt IRA distributions and pensions is also active — the broader flag already removed all pension income, so the federal-only flag would double-subtract. Both flags can coexist safely.
IF stateExemptsFederalPension AND NOT stateExemptsRetirementIncome THEN: State Taxable Income -= sum of pension items where isFederalPension = true
Example: Virginia client (federal-pension exemption on, broader exemption off): $45,000 FERS annuity flagged as federal pension removed; $30,000 private pension remains taxable.6. Apply Effective Rate
Multiply the resulting state taxable income by the effective state rate. The result is rounded to the nearest dollar.
State Income Tax = Round(State Taxable Income x State Rate)
Example: $100,000 x 7.2% = $7,200 state income tax.7. Auto-Add to SALT Deduction
The calculated state income tax is automatically combined with manually entered property taxes and local income taxes from Tax Data. The combined total is then capped by the applicable SALT limit.
Total SALT = Auto-Calculated State Income Tax + Manual Property/Local Taxes SALT Deduction = Min(Total SALT, Effective SALT Cap) Effective SALT Cap = Max(Floor, Statutory Cap − 30% of MAGI over the threshold)
Example: $7,200 auto state tax + $12,000 property tax = $19,200 total SALT, capped at $10,000 (2024), $40,000 (2025), or $40,400 (2026) for MFJ.
Real-world context
Why an Effective Rate Instead of State Brackets?
Modeling all 50 states progressive bracket structures with annual updates would add enormous complexity with limited planning value. The effective-rate approach gives advisors a fast, accurate-enough state tax figure for lifetime projections and client conversations.
IRS reference: State tax law varies by jurisdiction
Social Security and Retirement Income Exemptions
Many states reduce state tax on retirement income to attract retirees. About 41 states plus DC either have no income tax or exempt Social Security. About 15 states fully exempt pension and IRA income. These exemptions can reduce state taxable income by $20,000-$60,000/year for retired clients.
IRS reference: State-specific statutes
Federal Pension Exemption: PA, NY, VA, and Others
Pennsylvania and New York exempt all pensions from state income tax via the broader retirement-income exemption. States like Virginia, Massachusetts, Kentucky, North Carolina, and Arizona have a narrower exemption that applies only to federal, military, or state-government pensions but NOT to private-employer pensions. These narrower exemptions often come with age, income, or service-year tests that vary by client. Stratum does not pre-populate these narrower defaults; the advisor enables the federal-pension exemption manually and adjusts the rate if the exemption is partial.
IRS reference: State-specific statutes; verify current state law
No-Income-Tax States
Nine states impose no individual income tax: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming, and New Hampshire. Selecting one of these sets the rate to 0% and marks all exemption flags as true. State income tax contributes $0 to SALT.
State Income Tax and the SALT Cap
Auto-calculated state income tax is the most significant driver of the SALT deduction for most clients. In high-tax states, state income tax alone can exceed the SALT cap, meaning property taxes provide no incremental deduction.
IRS reference: IRC 164(b)(6); see SALT Deduction help
What drives the result
Selecting a state auto-populates the effective rate, Social Security exemption, and retirement income exemption. Clearing the state removes all state tax from the projection.
Switching from California (7.2%) to Florida (0%) eliminates lifetime state taxes.
When enabled, the taxable portion of SS is excluded from the state tax base. Impact grows as SS benefits increase.
$36,000 taxable SS x 7.2% = $2,592/year in state tax saved if SS is exempt.
When enabled, all IRA withdrawals and pension income (both federal and private) are excluded from the state tax base. When this is on, the federal-pension-only flag has no additional effect (already exempt).
$60,000 IRA distribution x 7.2% = $4,320/year in state tax saved.
When enabled (and Exempt IRA distributions and pensions is OFF), only pension income items flagged as federal / military / state-government pensions are excluded from state taxable income. Private pensions remain taxable. The checkbox is disabled in the UI when the broader exemption is on to prevent double-counting.
Virginia client, federal-pension exemption on, broader exemption off: $45,000 FERS annuity exempted; $30,000 corporate pension remains taxable.
Marks a specific pension as a government pension. Required for the Exempt federal pensions scenario assumption to exclude it from state taxable income.
FERS annuity: check this box. Corporate defined-benefit pension: leave unchecked.
Assumptions
- State income tax is modeled as a flat effective rate; progressive state brackets are not modeled
- State taxable income starts from federal AGI; federal below-the-line deductions do not reduce it
- Social Security and retirement income exemptions are binary (fully exempt or not)
- The federal-pension exemption is binary; partial or age-gated exemptions are not modeled
- The federal-pension exemption only reduces state taxable income when the broader retirement exemption is OFF
- The same state and rate apply for every year of the projection
- If no state is configured (rate = 0), no state income tax is modeled
- Auto-calculated state income tax is treated as income tax for SALT purposes
Limitations
- Does not model progressive state income tax brackets
- Does not model partial retirement income exemptions (e.g., states that exempt only the first $X of pension income)
- Does not model age or income thresholds attached to government-pension exemptions (VA, MA, KY, NC, AZ require eligibility tests that vary by client)
- Does not model mid-year state residency changes or multi-state income sourcing
- Does not model state-specific deductions or credits beyond the three exemption flags
- State rates are representative effective rates and are not updated automatically when state law changes
- State Alternative Minimum Tax is not modeled
Related
This page explains how Stratum models this calculation. It is educational material for financial professionals, not tax or legal advice, and tax law changes. Verify current figures against primary IRS sources before relying on them with a client.