Archive for ‘Tax’

January 9, 2012

How State Income Tax Works

The majority of Americans will have to pay a state income tax in addition to the federal income tax. 41 of the 50 states have a state income tax of some sort. Only nine states Wyoming, Texas, Nevada, Washington, South Dakota, Florida, Tennessee, New Hampshire and Alaska have no state income tax. Residents of these states only have to pay the federal income tax.

Not every resident of the other states will have to pay a state income tax. To determine if you will have to pay this tax and the rate you will need to contact your state government directly. The agency that collects the income tax is usually the state department of revenue. This can usually be accessed through your state government’s website.

Collection of State Income Taxes

State income taxes are not collected by the IRS instead they are collected directly by the state government. If you have to pay state income tax you will have to send a payment to the state. If you are entitled to a state income tax refund you will receive a second refund payment from the state.

In most cases you will receive your federal tax refund before your state refund. Most states will send your refund to you electronically.

Reporting State Income Taxes

Most states will base the amount of state income tax on what you report on your federal tax return. You will have to put the amounts from your 1040 on your state tax return. Most tax software will fill out your state return as well as your federal income taxes.

If you are using an online tax preparation program or tax preparation software make sure that it includes your state. Not every program includes every state’s taxes. Almost every state will take electronic tax returns.

Something to remember is that some states charge additional capital gains taxes. Others charge additional taxes on higher income individuals.

Multiple State Taxes

If you live in more than one state in a tax year you will probably have to pay income taxes to both states. That means you will have to fill out a tax return for each state. It also means that you could receive a tax refund from more than one state. It might be possible to get a lower tax rate or avoid income tax by declaring your legal residence in a state with no income taxes or low income taxes.

State Income Tax Deductions

State income deductions are not the same as federal income tax deductions. Most federal income tax deductions will not apply to state income taxes. Some states will actually give residents more deductions.

Most states but not all states, allow residents to deduct all or most of their Social Security payments from their state income tax. Some states such as Michigan and North Carolina will let residents deduct all retirement income from their income taxes. That includes pensions, annuities and military retirement pay. That means it is possible to reduce your income tax bill by moving to another state when you retire.

There are also special tax deductions available in many states. Most states allow senior citizens to deduct property taxes from their state income tax. Many states also allow residents to deduct sales taxes collected on food from their state income taxes. Some states also give special tax refunds to lower income people to make up for sales tax.

This is why it is always a good idea to read the material from your state department of revenue carefully. There maybe deductions you are missing out on.

Steven Hart is a freelance writer and a Financial Advisor from Cary, IL. He writes about Annuity topics like Annuities Explained, Fixed Income Annuity, and Annuity Leads.

January 9, 2012

How Sales Tax Works

A sales tax takes the form of a charge added to the cost of a good or service. This is usually calculated as a percentage of the cost of the item. Sales taxes are usually automatically collected when a person makes a purchase at a store. Most register receipts will show you what percentage of tax was added to the sale.

General Sales Tax

The most common sales tax in the US is a general sales tax which is imposed on all or most purchases within a specific jurisdiction. In states without income taxes this is used to support the state government. In most areas it is used to support local governments such as the city or county or a special district.

The collection of this tax varies widely. In many places food purchased from grocery stores is exempt from it. Some states such as Colorado will not collect sales taxes on services. Others such as Texas tax services. If you run a home business or work as a freelancer in a state that taxes services you may need to charge or pay sales tax. The state tax agency can show you how this is done.

Other items that can be exempt are clothing, rent, medical services, medical equipment and prescription medicine. In many cases non-profit organizations and some businesses are exempt from the tax.

Collection of the Sales Tax

The sales tax is usually collected at the point of sale. That is it is paid by the business rather than the consumer. In some cases consumers will be held liable for state sales tax. A person who orders something from out of state via an online vendor or a catalog could have to pay the sales tax as part of the income tax. If there’s a state sales tax in your state you should check with your state department of revenue to see if you will have to pay it.

Sales Tax Rates

You can usually calculate what your sales tax rate is by adding up the sales tax on your receipts. Something to remember is that there maybe several levels of tax added to a purchase. The city, county, and special districts may add taxes to an item. That means the effective sales tax rate can often be much higher than you expect. Some urban areas such as New York City and Chicago effective charge sales taxes that are well over 10%.

Excise Taxes

There is no general federal sales tax in the USA but there are excise taxes. An excise tax is a levy that is charged on a specific item or product. The federal government charges excises taxes on vehicle fuel, tobacco, alcohol and a number of other products. The 2010 healthcare reform act added excise taxes on tanning salons and some high-dollar insurance policies.

Many state and local governments also charge excise taxes on certain items. Most states charge excise taxes on tobacco and alcohol. Recently there have been demands to charge excise taxes on fatty foods and fast foods.

Sales Taxes and Income Taxes

Something to remember is that sales tax can be deducted from your federal income tax. The IRS considers sales taxes a deductible expense. Some states with sales taxes on food, allow citizens to deduct those taxes from the state income tax.

Value Added Tax

There is no Value Added Tax or VAT in the United States. A VAT is a sales tax that is collected on all levels of a business transaction. A retailer would pay the VAT when it purchased an item from a wholesaler and when it sold the item to the customer. The VAT is the main sales tax used in Europe.

Steven Hart is a freelance writer and a Financial Advisor from Cary, IL. He writes about Annuity topics like Ordinary Annuity, Retirement Annuity, and Income Annuity.