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Nebraska Income Tax in 2025: Why This Year Is Different

Nebraska has been rewriting its income tax code in real time, and the 2025 tax year is where the most visible changes arrive at once. The state’s income tax history begins in 1967 — relatively late compared to most states — and for decades ran as a straightforward percentage of federal tax liability. The current bracket structure, with rates from 2.46% at the bottom to what was once 6.84% at the top, emerged from a series of reforms in the 1980s and 1990s. That top rate of 6.84% had been in place for years when the legislature decided in 2023 that Nebraska was losing competitive ground to Iowa, South Dakota, and the growing number of states cutting rates. Legislative Bill 754, signed in 2023, set in motion the most dramatic top-rate reduction in Nebraska’s history: from 6.84% in 2023 to 5.84% in 2024, then 5.20% in 2025, then 4.55% in 2026, and finally 3.99% in 2027. That is a cut of nearly three full percentage points over four years — specifically targeting the bracket that touches the most economically mobile workers and business owners.

The Social Security change deserves separate attention because of how Nebraska got here. Unlike states that simply decided to exempt Social Security benefits in one legislative session, Nebraska built a four-year ramp starting in 2022: 50% of benefits were exempt that year, then 60% in 2023, then 80% in 2024, and now 100% effective January 1, 2025. Every year since 2022, Nebraska retirees have seen their Social Security benefits become a little more tax-free, until this year, when that number hits zero. A couple receiving $50,000 in Social Security income who earned above the old exemption threshold was paying Nebraska state tax on up to $42,500 of those benefits in 2024 — at the 5.20% marginal rate, that was roughly $2,200 in annual state tax on income they will now owe nothing on. The exemption applies to everyone: no income ceiling, no age requirement, no phase-out. You either have Social Security income or you don’t, and in 2025, Nebraska doesn’t tax it. LB 754 also extended full exemption to federal civil service retirement income — CSRS and FERS annuities — effective tax year 2024, adding a second layer of relief for the significant federal-employee population in Nebraska, particularly around Offutt Air Force Base and federal agencies in Omaha and Lincoln.

The part of Nebraska’s tax code that most newcomers don’t know about: inheritance tax. Nebraska is one of only six states in the country that still levies a tax on what heirs receive from an estate — not the estate itself, but the recipients. LB 310, passed in 2023, eliminated the inheritance tax for immediate family: spouses, children, grandchildren, parents, and grandparents are now fully exempt. But the tax persists for distant relatives and non-relatives on inheritances above $40,000, at rates that range from 1% for aunts, uncles, nieces, and nephews to 18% for non-relatives. Nebraska also follows the federal standard deduction rather than setting its own — which means Nebraska taxable income tracks relatively closely with federal taxable income, making pre-tax retirement contributions particularly effective at reducing both simultaneously. No Nebraska city or county levies a local income tax: Omaha, Lincoln, Bellevue, Grand Island, Kearney, and every other Nebraska municipality are income-tax-free at the local level.