Three states cut their income tax rates effective January 1, 2026: Kentucky, Montana, and Nebraska. These aren't small tweaks — Kentucky dropped half a percentage point on its flat rate, Montana shaved a quarter point off the top bracket, and Nebraska cut 65 basis points from its highest tier.
For someone earning $100,000 in Kentucky, that's about $500 back per year. Not life-changing, but not nothing either.
And it's part of a broader trend. Over the past five years, more than a dozen states have either cut income tax rates or moved to flat-tax systems. The goal? Compete with the nine states that charge no income tax at all.
Let's break down what changed, who saves the most, and how these states now rank compared to the rest of the country.
The Three States That Cut Rates
All three of these cuts were passed in prior legislative sessions and took effect automatically on January 1, 2026. No new votes, no budget drama — just scheduled reductions that were already locked in.
| State | Old Rate (2025) | New Rate (2026) | System | Savings at $100k |
|---|---|---|---|---|
| Kentucky | 4.0% flat | 3.5% flat | Flat tax | ~$500/year |
| Montana | 5.9% (top) | 5.65% (top) | Progressive (7 brackets) | ~$250/year |
| Nebraska | 5.2% (top) | 4.55% (top) | Progressive (4 brackets) | ~$650/year |
The savings vary by income level and system structure. Kentucky's flat tax means everyone gets proportional relief. Montana and Nebraska use progressive brackets, so the benefit skews toward higher earners who hit the top rates.
Kentucky: Now at 3.5% Flat
Kentucky switched to a flat tax in 2022 at 5%. The rate has been dropping annually since then as part of a multi-year phase-down plan. It hit 4% in 2024, and now it's 3.5% for 2026.
The eventual target is 3%, but that's contingent on revenue growth hitting specific benchmarks. If state revenue stays strong, the rate could drop to 3.25% in 2027 and 3% by 2028. If revenue dips, the rate stays where it is.
Who Saves:
- $50,000 income: save ~$250/year
- $75,000 income: save ~$375/year
- $100,000 income: save ~$500/year
- $150,000 income: save ~$750/year
- $200,000 income: save ~$1,000/year
The savings are linear because it's a flat tax. Every dollar of taxable income gets the same 0.5% reduction.
Kentucky also has relatively low property taxes and no local income tax in most counties (Louisville has a 2.2% city tax). Combined with the 3.5% state rate, it's now one of the more tax-friendly states in the Southeast — cheaper than North Carolina (4.5%), Virginia (varies, top ~5.75%), and Tennessee (which has no income tax but higher sales and property taxes).
Montana: Top Rate Drops to 5.65%
Montana has seven income tax brackets. The top rate applied to income over $20,500 (single filers) or $41,000 (married filing jointly). That top rate dropped from 5.9% to 5.65% for 2026.
Because the threshold is so low — basically anyone earning more than $40k hits the top bracket — this cut affects most working Montanans, not just high earners.
Who Saves:
- $50,000 income: save ~$125/year (partial top-bracket exposure)
- $75,000 income: save ~$175/year
- $100,000 income: save ~$250/year
- $150,000 income: save ~$375/year
- $200,000 income: save ~$500/year
The savings are smaller than Kentucky's because the rate cut is only 0.25 percentage points. And Montana has relatively high property taxes (average ~2.6% of personal income), so the overall state tax burden is still above the national median.
But for remote workers considering Montana for the lifestyle (mountains, outdoor access, relatively low cost of living in non-resort towns), the income tax cut makes it slightly more competitive with neighboring states like Wyoming (0% income tax) and Idaho (5.8% top rate, dropping to 5.695% in 2026).
Nebraska: Down to 4.55%
Nebraska's cut is the biggest in percentage terms. The top rate dropped from 5.2% to 4.55% — a reduction of 65 basis points. That's a 12.5% relative cut.
The top bracket kicks in at $35,730 (single) or $71,460 (married filing jointly). So anyone earning above that sees the full benefit on income in the top tier.
Who Saves:
- $50,000 income: save ~$350/year
- $75,000 income: save ~$525/year
- $100,000 income: save ~$650/year
- $150,000 income: save ~$975/year
- $200,000 income: save ~$1,300/year
Nebraska also has high property taxes (average ~3.4% of personal income, one of the highest in the nation). So even with this income tax cut, the total tax burden is still above the national average.
But if you're choosing between Nebraska and neighboring Iowa (which dropped to a 3.8% flat rate in 2025), Nebraska is now more competitive on the income tax side — though Iowa's overall tax environment is still slightly better for most earners.
How These States Now Rank Nationally
After these cuts, here's how Kentucky, Montana, and Nebraska rank compared to all 50 states on income tax burden (considering rates, brackets, and deductions):
| State | 2026 Rank (1 = lowest tax) | Notes |
|---|---|---|
| Kentucky | ~15th | 3.5% flat is competitive with many low-tax states |
| Montana | ~28th | 5.65% top rate is mid-pack; property tax burden pulls it down |
| Nebraska | ~22nd | 4.55% is decent, but high property taxes offset the benefit |
For comparison:
- The nine no-income-tax states (AK, FL, NV, NH, SD, TN, TX, WA, WY) still rank #1–9 on income tax burden (obviously — it's zero).
- North Carolina (4.5% flat) and Indiana (3.05% flat) remain the lowest-tax states that actually have an income tax.
- California (13.3% top), Hawaii (11% top), and New York (10.9% top) remain the highest-tax states.
So Kentucky's 3.5% flat puts it in the top third of states for income tax competitiveness. Montana and Nebraska are mid-pack — better than high-tax states, worse than the flat-tax and no-tax states.
The Bottom Line
If you live in Kentucky, Montana, or Nebraska, your 2026 state income tax bill just got smaller. Not by a lot — we're talking a few hundred to a thousand dollars for most earners — but it's real money.
Kentucky's 3.5% flat rate makes it one of the more competitive states in the Southeast. Montana's 5.65% is mid-pack. Nebraska's 4.55% is better than before but still offset by high property taxes.
And if you're a retiree in West Virginia, the Social Security exemption is a bigger deal than any of these rate cuts. That's $1,000+ per year for a typical Social Security recipient.
The broader trend? States are cutting income taxes to compete with the nine no-tax states. Kentucky, Iowa, Mississippi, and Georgia have all moved to flat taxes in the past five years. More are coming.
If you're considering a move for tax reasons, these cuts make Kentucky, Montana, and Nebraska slightly more attractive than they were a year ago. But they're still not beating Florida, Texas, or Tennessee on total tax burden.
Want to see how your state ranks? Use our Best Places to Live & Work tool to compare total tax burden (income + property + sales + FICA) across all 50 states at your income level. We factor in cost of living and show real purchasing power, not just tax rates.