Arkansas has executed one of the most aggressive income tax reduction campaigns in the South. The top rate has been slashed from 5.9% in 2021 to 3.9% in 2026 — a 2-percentage-point cut in five years — with legislation targeting a 3.5% ceiling by 2027. For a mid-income earner, that trajectory translates to hundreds of dollars in annual savings that compound over time.
What makes Arkansas's bracket structure unusual in 2026 is that the top rate (3.9%) is actually lower than the middle bracket rate (4%). This counterintuitive design is the direct result of Arkansas applying rate cuts to the highest bracket first, before the lower brackets could fully catch up. The result: a filer with $15,000 in taxable income briefly pays a higher marginal rate on some income than a filer with $50,000. It's quirky — and it won't last as future cuts continue — but it's the current law.
Beyond the headline rate, Arkansas offers strong exemptions for Social Security, military retirement, and state pension income. The 50% capital gains exclusion effectively caps the rate on long-term investment gains at around 1.95% — a significant advantage for investors and business owners selling appreciated assets.
Arkansas uses three income tax brackets for 2026 — and all filing statuses (single, married filing jointly, married filing separately, head of household) use the same bracket thresholds. This simplifies the system but also means there is no marriage bonus or penalty at the bracket level.
| Taxable Income | Rate |
|---|---|
| $0 – $5,100 | 2% |
| $5,100 – $10,300 | 4% |
| Above $10,300 | 3.9% |
Why is the top rate (3.9%) lower than the middle bracket (4%)? This is the result of Arkansas applying rate-cut legislation to the top bracket first. When the legislature passed cuts reducing the top rate from higher levels, the middle bracket hadn't yet been adjusted to match. The practical effect is minor — the 4% bracket only covers $5,200 of income ($5,100 to $10,300), so the maximum extra tax from this quirk is just $5.20 per return. But conceptually it's the opposite of a progressive structure for that slice of income. Future rate-cut legislation is expected to eventually harmonize the brackets.
Arkansas starts from federal adjusted gross income (AGI) and then applies Arkansas-specific modifications:
| Step | Amount |
|---|---|
| Gross income | $100,000 |
| Minus standard deduction | −$2,200 |
| Arkansas taxable income | $97,800 |
| Tax: 2% × $5,100 | $102 |
| Tax: 4% × $5,200 | $208 |
| Tax: 3.9% × $87,500 | $3,413 |
| Subtotal before credits | $3,723 |
| Minus $29 personal exemption credit | −$29 |
| Total Arkansas income tax | $3,694 |
| Effective rate | 3.69% |
Arkansas has been on a sustained multi-year income tax reduction path since 2021. The reform agenda has bipartisan support and has been executed through a combination of permanent rate cuts and revenue-trigger provisions.
| Tax Year | Top Income Tax Rate | Change |
|---|---|---|
| 2021 | 5.9% | Pre-reform baseline |
| 2022 | 5.5% | −0.4 pp |
| 2023 | 4.7% | −0.8 pp |
| 2024 | 4.4% | −0.3 pp |
| 2025 | ~4.0% | −0.4 pp |
| 2026 | 3.9% | −0.1 pp |
| 2027 (target) | 3.5% | −0.4 pp (legislative goal) |
The 2027 target of 3.5% is an expressed legislative goal, not yet enacted law at the time of writing. Revenue trigger provisions mean the cuts continue as long as Arkansas general revenue meets growth thresholds. With Arkansas maintaining a significant general revenue surplus, the path to 3.5% appears achievable.
Because Arkansas's cuts have disproportionately targeted the top bracket (which kicks in above $10,300), higher-income filers benefit more in absolute dollar terms. A filer with $200,000 in taxable income has seen their marginal rate on income above $10,300 fall from 5.9% to 3.9% — a 2-point reduction worth approximately $3,740 annually on that income slice alone. A filer with $15,000 in taxable income has seen smaller but still meaningful reductions in their effective rate.
Some Arkansas legislators have expressed an aspirational goal of eventually eliminating the state income tax entirely — as Tennessee did with investment income in 2021. Tennessee's example (no income tax on wages or salaries) is frequently cited in Little Rock budget discussions. Whether Arkansas gets there depends on revenue trends, but the trajectory is clearly toward lower rates, not higher ones.
Arkansas offers one of the more favorable capital gains treatments among states that impose an income tax. Under Arkansas law, 50% of net capital gains are excluded from Arkansas taxable income. This applies to both short-term and long-term capital gains, though in practice the benefit is most significant for long-term investors.
| Type of Gain | 50% Exclusion Applied To | Effective Arkansas Rate |
|---|---|---|
| Long-term capital gain (top bracket) | 3.9% × 50% of gain | ~1.95% |
| Short-term capital gain (top bracket) | 3.9% × 50% of gain | ~1.95% |
To illustrate: if you sell stock with $100,000 in capital gains, only $50,000 is included in your Arkansas taxable income. At the 3.9% top rate, your Arkansas capital gains tax is $1,950 — an effective rate of 1.95% on the full gain.
For business owners selling a company, real estate investors selling appreciated property, or long-term stock investors, the 50% exclusion substantially reduces Arkansas's tax cost. Compare Arkansas's effective ~1.95% rate to neighboring states:
| State | Capital Gains Treatment | Effective Top Rate on LT Gains |
|---|---|---|
| Arkansas | 50% excluded | ~1.95% |
| Tennessee | No income tax on wages; no capital gains tax | 0% |
| Missouri | Fully taxed as ordinary income | ~4.7% |
| Oklahoma | Fully taxed as ordinary income | 4.5% |
| Louisiana | Fully taxed as ordinary income | 3% |
Tennessee remains the obvious benchmark for capital gains — zero state tax — but among states with an income tax, Arkansas's 1.95% effective rate is highly competitive. For an investor who wants the amenities of a larger Arkansas city (Little Rock, Fayetteville) with meaningful capital gains tax savings, this exclusion is a real differentiator.
Arkansas exempts 100% of Social Security benefits from state income tax, with no income threshold or means test. This is the most generous treatment possible — unlike some states that phase in SS taxation above certain AGI levels, Arkansas simply does not tax Social Security at all, regardless of your total income. A retiree receiving $30,000/year in Social Security benefits pays zero Arkansas income tax on that income.
Arkansas's pension exemption rules vary by income source:
Consider a retired Arkansas couple receiving: $24,000 in Social Security (fully exempt) + $20,000 from ATRS teacher pension (fully exempt) + $30,000 from IRA distributions. Of the $74,000 total income, only the IRA distributions are taxable — and only $30,000 − $6,000 exemption = $24,000 is subject to Arkansas tax. With the $4,400 MFJ standard deduction, taxable income is $19,600, generating a tax bill of approximately $627 before the $58 personal exemption credits — an effective rate under 1% on total household income.
| Retirement Income Source | Arkansas Tax | Tennessee Tax |
|---|---|---|
| Social Security | 0% (fully exempt) | 0% (no income tax) |
| Military pension | 0% (fully exempt) | 0% (no income tax) |
| State pension | 0% (fully exempt) | 0% (no income tax) |
| Private pension / IRA (first $6,000) | 0% (exemption) | 0% (no income tax) |
| Private pension / IRA (above $6,000) | 2%–3.9% | 0% (no income tax) |
Tennessee is the winner for retirees with large private pension or IRA income above the $6,000 Arkansas exemption. But for retirees relying primarily on Social Security, public pensions, and military retirement, the tax difference between Arkansas and Tennessee is minimal — and Arkansas often wins on cost of living and property taxes.
Arkansas's average effective property tax rate is approximately 0.63% — well below the national average of about 1.1% and among the lowest in the South. On a $250,000 home, that's roughly $1,575/year in property taxes, compared to $2,750 in a state at the national average.
| City / County | Approximate Effective Rate | Annual Tax on $250K Home |
|---|---|---|
| Little Rock / Pulaski County | ~0.68% | ~$1,700 |
| Fayetteville / Washington County | ~0.63% | ~$1,575 |
| Bentonville / Benton County | ~0.54% | ~$1,350 |
| Fort Smith / Sebastian County | ~0.64% | ~$1,600 |
| Jonesboro / Craighead County | ~0.62% | ~$1,550 |
Arkansas provides a homestead property tax credit of up to $375/year for owner-occupied primary residences. Seniors age 65+ or totally disabled homeowners may qualify for an assessment freeze that limits future property tax increases. There is no local income tax in Arkansas to supplement these figures — cities and counties rely primarily on sales and property taxes for local revenue.
Arkansas's 6.5% state sales tax is among the highest state rates in the country. When local city and county taxes are added, combined rates can reach 9.125% in Little Rock and above 10% in some municipalities. This is the explicit trade-off Arkansas has made: lower income taxes, funded in part by consumption taxes.
| City | State | Local | Combined |
|---|---|---|---|
| Little Rock | 6.5% | 2.625% | 9.125% |
| Fort Smith | 6.5% | 3.5% | 10.0% |
| Fayetteville | 6.5% | 2.0% | 8.5% |
| Springdale | 6.5% | 3.0% | 9.5% |
| Jonesboro | 6.5% | 2.0% | 8.5% |
One partial offset: Arkansas taxes groceries (food for home consumption) at a reduced 0.125% state rate — essentially exempt. Prepared restaurant food is taxed at the full combined rate. For a family spending $800/month on groceries, the near-zero grocery rate saves approximately $52/year versus paying full rate — a meaningful but not decisive offset to the broader high-sales-tax environment.
Tennessee is the most common comparison for Arkansas — both are Southern states, share a border, and appeal to similar demographics. Tennessee's lack of any income tax (on wages, salaries, investment income, and most other income) makes it the straightforward winner on income tax. But the full picture is more nuanced.
| Tax Category | Arkansas | Tennessee | Winner |
|---|---|---|---|
| Income tax (wages) | 2%–3.9% | 0% | Tennessee |
| Social Security | Exempt | Exempt (no income tax) | Tie |
| Military pension | Exempt | Exempt (no income tax) | Tie |
| Capital gains | ~1.95% effective | 0% | Tennessee |
| State sales tax | 6.5% | 7.0% | Arkansas |
| Grocery sales tax | 0.125% (near-zero) | 4% (reduced rate) | Arkansas |
| Property tax (avg) | ~0.63% | ~0.71% | Arkansas |
| Local income tax | None | None | Tie |
Arkansas's lower property tax and near-zero grocery tax are genuine advantages over Tennessee. For a retiree living primarily on Social Security and a military pension — both fully exempt in Arkansas — the income tax difference is zero. In that scenario, Arkansas's lower property taxes and grocery tax treatment may make the overall tax burden roughly comparable or even slightly favorable to Tennessee, depending on spending patterns and home value.
For workers earning $100,000+ in wages, Tennessee's zero income tax saves $3,694/year compared to Arkansas (using the calculation from this guide). Over 10 years, that's $36,940+ — a compelling case for relocating. For investors with large capital gains events, Tennessee's zero capital gains rate versus Arkansas's ~1.95% becomes significant quickly on six-figure gain amounts.
Tennessee wins on income and capital gains taxes. Arkansas wins on property tax and grocery treatment. For most working-age residents with meaningful incomes, Tennessee has the edge. For retirees living primarily on exempt income sources, the gap closes substantially — and Arkansas's cost of living and cities may be a compelling alternative to Nashville or Memphis.
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Arkansas's evolving income tax brackets, capital gains exclusion rules, and retirement income exemptions are best navigated with a professional. TaxHub connects you with licensed CPAs who understand Arkansas tax law.
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