Posts tagged ‘state income 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.