Taxes are a major hassle for everyone, whether you work for an employer or operate your own business. Taxpayers must additionally pay state income tax in the majority of states in addition to paying federal taxes on their income. A state may impose a direct tax known as a state income tax on income derived within or from the state.
It may refer to all of your income, regardless of where it was obtained in your home state. State income taxes are self-assessed, just like federal taxes, thus filers must submit the necessary state tax returns. Compared to federal income taxes, state income tax rates receive relatively little attention, yet they can still severely hurt your finances. How much depends on your income as well as your residence and place of employment.
We’re going to examine state income taxes in this article. We’ll talk about the various state tax structures, state tax rates, and which states don’t impose state income taxes. We’ll also look at possible tax reduction strategies. To find out more about state income tax, continue reading.
Table of Content
- 1 What is State Income Tax
- 2 How State Income Tax Work
- 3 State Business Income Taxes
- 4 States with an Income Tax
- 5 States without a State Income Tax
- 6 States with Flat Income Tax Rates
- 7 Calculation of the Local and State Income Tax Deduction
- 8 State Income Tax Paid By the Employers or Employees
- 9 Conclusion
- 10 Frequently Asked Questions
What is State Income Tax
The tax paid to state governments is known as the state income tax. It is a portion of the wages earned by both citizens and non-residents who reside in the state where taxes are being paid and/or work there. These levies go toward funding state public policies and initiatives.
Funded by State Income Taxes:
- Roadway upkeep
- Universities and Public Schools
- Law Enforcement Organizations
- Plans for Healthcare and Medicaid
- Libraries
- Transportation in General
- Government Help
Several states have no state income tax. Instead, some states might impose additional taxes or greater real estate or sales taxes. States have a wide range of differences in their tax laws, rates, processes, and forms. While filing dates can differ, for individuals, state tax day normally comes on April 15-the same day as federal tax day.
If you reside and work in the same state, income taxes are rather simple. However, you might need to submit more than one state tax return if you moved to another state during the year or if you live in one state while working in another. You should be aware of the laws in any state where you live or work as they differ from state to state and can result in financial fines. You can also be compelled to pay local taxes along with your federal and state income taxes.
How State Income Tax Work
- State governments take a portion of a person’s salaries to fund various programs and public services, similar to how the federal government does.
- The requirement to file tax returns in a state applies whenever a taxpayer’s income exceeds the filing threshold for that state in any given year. Many states follow federal laws regarding the recognition of income and deductions. Some people could even insist that the person file their federal income tax return and a copy of their state income tax return at the same time.
- Living in a state with an income tax means you can’t avoid paying it by working in a state without one. Even though your earnings were made in a place where there is no income tax, your home state will nevertheless tax the money. States compel taxpayers with income that is not subject to withholding, such as company or self-employment income, to estimate their yearly tax burden and pay it in four quarterly installments, just as the Internal Revenue Service (IRS).
- Taxpayers who don’t file and pay their state income taxes on time and in full will be subject to fines and interest from the state. Knowing that states cannot change their state income taxes after the relevant statute of limitations has run gives many taxpayers some relief.
- State income taxes come in three different forms:
- No State Income Tax: A few states do not have state income taxes
- Taxation at a Fixed Rate: Flat rate Income taxes that are levied at a flat rate apply to all taxpayers equally, irrespective of their income level.
- Gradual Income Tax: Gradual income tax, sometimes referred to as progressive rate tax, is based on the amount of earned income. In this system, people who make more money pay a higher tax rate.
| State Income Tax-free States | States That Have A Flat State Income Tax | States That Have A Graduated State Income Tax |
|---|---|---|
| Alaska | Colorado | Alabama |
| Florida | Illinois | Arizona |
| New Hampshire | Indiana | Arkansas |
| Nevada | Kentucky | California |
| South Dakota | Massachusetts | Connecticut |
| Tennessee | Michigan | Delaware |
| Texas | North Carolina | Georgia |
| Washington | Pennsylvania | Hawaii |
| Wyoming | Utah | Idaho |
| Iowa | ||
| Kansas | ||
| Louisiana | ||
| Maine | ||
| Maryland | ||
| Minnesota | ||
| Mississippi | ||
| Missouri | ||
| Montana | ||
| Nebraska | ||
| New Jersey | ||
| New Mexico | ||
| New York | ||
| North Dakota | ||
| Ohio | ||
| Oklahoma | ||
| Oregon | ||
| Rhode Island | ||
| South Carolina | ||
| Vermont | ||
| Virginia | ||
| Washington D.C. | ||
| West Virginia | ||
| Wisconsin |
State Business Income Taxes
Corporations, partnerships, as well as specific trusts and estates, are subject to income taxes in some states. These states usually provide special exemptions and cheaper corporate rates to entice businesses to locate there. A U.S. or foreign firm cannot be taxed by a state unless there is a significant connection, or “nexus,” between the two.
State-specific requirements for establishing a nexus vary, but they typically involve possessing capital assets or Real Estate there, employing people there, or having a source of income in the state. Even though, the income taxes levied must still adhere to other constitutional requirements and be proportionate and nondiscriminatory.
States with an Income Tax
State income taxes are common. More specifically, a flat-rate or graduated-rate state income tax is used in 41 states plus the District of Columbia. The state income tax rates for 2022, as well as the current tax rate ranges per state, are shown in the table below. The lowest income thresholds for the two tax categories are also included.
Rates of State Income Tax For 2022
| State Name | Income Tax Rate of State | Income Tax Rate Range of State |
|---|---|---|
| Alabama | 2%-5% | $1-$3,001 |
| Alaska | No state income tax | N/A |
| Arizona | 2.59%-4.5% | $1-166,844 |
| Arkansas | 2%-5.5% | $1-$8,501 |
| California | 1%-13.3% | $1-$1,000,001 |
| Colorado | 4.55% | N/A |
| Connecticut | 3%-6.99% | $1-$500,001 |
| Delaware | 2.2%-6.6% | $2,001-$60,001 |
| Florida | No state income tax | N/A |
| Georgia | 1%-5.75% | $1-$7,001 |
| Hawaii | 1.4%-11% | $1-$200,001 |
| Idaho | 1%-6% | $1-$7,940 |
| Illinois | 4.95% | N/A |
| Indiana | 3.23% | N/A |
| Iowa | 0.33%-8.53% | $1-$78,436 |
| Kansas | 3.1%-5.7% | $1-$30,001 |
| Kentucky | 5% | N/A |
| Louisiana | 1.85%-4.25% | $1-$50,001 |
| Maine | 5.8%-7.15% | $1-$54,451 |
| Maryland | 2%-5.75% | $1-$250,001 |
| Massachusetts | 5% | N/A |
| Michigan | 4.25% | N/A |
| Minnesota | 5.35%-9.85% | $1-$171,221 |
| Mississippi | 4%-5% | $5,001-$10,001 |
| Missouri | 1.5%-5.4% | $109-$8,705 |
| Montana | 1%-6.75% | $1-$18,801 |
| Nebraska | 2.46%-6.84% | $1-$33,181 |
| Nevada | No state income tax | N/A |
| New Hampshire | 5% (interest & dividends only) | N/A |
| New Jersey | 1.4%-10.75% | $1-$1,000,001 |
| New Mexico | 1.7%-5.9% | $1-$210,001 |
| New York | 4%-10.9% | $1-$25,000,001 |
| North Carolina | 4.99% | N/A |
| North Dakota | 1.1%-2.9% | $1-$445,001 |
| Ohio | 2.765%-3.99% | $25,001-$110,651 |
| Oklahoma | 0.25%-4.75% | $1-$7,201 |
| Oregon | 4.75%-9.9% | $1-$125,001 |
| Pennsylvania | 3.07% | N/A |
| Rhode Island | 3.75%-5.99% | $1-$155,051 |
| South Carolina | 3%-7% | $3,201-$16,041 |
| South Dakota | No state income tax | N/A |
| Tennessee | No state income tax | N/A |
| Texas | No state income tax | N/A |
| Utah | 4.95% | N/A |
| Vermont | 3.35%-8.75% | $1-$206,951 |
| Virginia | 2%-5.75% | $1-$17,001 |
| Washington | 7% (capital gains income only) | N/A |
| Washington D.C. | 4%-10.75% | $1-$1,000,001 |
| West Virginia | 3%-6.5% | $1-$60,001 |
| Wisconsin | 3.54%-7.65% | $1-$280,951 |
| Wyoming | No state income tax | N/A |
States without a State Income Tax
There are only nine states without state income taxes. These states have additional taxation methods, like a sales tax or a property tax. Below are the nine states that don’t have state income tax:
- Alaska
- Florida
- Nevada
- New Hampshire
- South Dakota
- Tennessee
- Texas
- Washington
- Wyoming
Note: Although earned earnings are not subject to taxation in New Hampshire, interest and dividends are currently subject to taxation. However, legislation that will phase out these taxes over the course of 2027 has been passed. No income tax in Washington. However, income from capital gains is taxed at a flat rate of 7%.
States with Flat Income Tax Rates
By applying the same tax rate to the most of income, ten states attempt to make things simple. Each state has its own definition of income. In New Hampshire, for example, regular income is often exempt from state tax, but dividend and interest income is subject to a flat tax rate. And while some states use adjusted gross income, others apply their tax rates to taxable income.
| State | Rate |
|---|---|
| Colorado | 4.55% |
| Illinois | 4.95% |
| Indiana | 3.23% |
| Kentucky | 5% |
| Massachusetts | 5% |
| Michigan | 4.25% |
| New Hampshire* | 5% |
| North Carolina | 4.99% |
| Pennsylvania | 3.07% |
| Utah | 4.95% |
| * On dividends and interest income only |
Calculation of the Local and State Income Tax Deduction
State and local taxes might be eligible for itemized deductions if you decide to do it on your federal income tax return. You may be qualified to deduct the following taxes, as per IRS regulations:
- State, Local, and International Income Taxes
- Real Estate Taxes on a State and Local Level
- Local as well as State Personal Property Taxes
- Municipal as well as State Sales Taxes
State and municipal general sales taxes cannot be deducted in addition to state and local income taxes. State or municipal taxes must have been levied against you and paid by you during the tax year in order to be deducted. In addition, the following are deductable:
- Estimated Annual Taxes Paid to State or Municipal Governments.
- State or Local Taxes Paid throughout the Year from the prior Fiscal Year.
State and local income, property, and sales tax deductions are capped at a total of $10,000, or $5,000 for married couples filing separately. You must include IRS Form Schedule A, which includes a list of all your itemized deductions, with your tax return.
State Income Tax Paid By the Employers or Employees
If you run a small business, you might be wondering if you’re liable for paying the state income taxes of your employees. The good news is that you are not responsible for paying the state income taxes of your employees. However, if you reside in a state that levies income taxes, you will be in charge of deducting the appropriate amount of state taxes from your employees’ paychecks. It will then be your duty to deliver these withholdings along with the proper tax documents to the relevant state office before the deadline.
Along with your personal tax return, you are accountable for filing and paying your own state income taxes as an employer. You or your employee will also be responsible for paying additional payroll taxes, such as local taxes, federal and state unemployment taxes, Medicare, and social security taxes.
Conclusion
It may be annoying to have a portion of your pay withheld for state income tax, but it’s vital to keep in mind that this money is needed to support crucial state programs and services. The law requires that you pay your state income tax, and doing so late might result in significant fines and penalties.
Taxpayers may also owe taxes to the state(s) in which they reside or conduct business in addition to federal taxes. You can no longer have the same income taxed by more than one state, but you still need to file taxes in each one that applies. Consult a tax expert if you think you might be affected by some of these issues to ensure that you are meeting your obligations and not paying more in taxes than you should.
Frequently Asked Questions
What is Supplemental withholding Rate?
States and territories may also provide an optional flat percentage of income tax withholding for wages that are in addition to normal compensation, similar to the federal supplemental income tax withholding rate. Where applicable, the supplemental rate makes it much easier to calculate the income tax withheld from irregular payments like bonuses, equity compensation, and separation pay.
On supplemental pay up to $1 million for the year, employers may elect to use a federal flat rate of income tax federal withholding of 22%; however, supplemental wages exceeding $1 million must be withheld at a mandated flat rate of 37%. Be aware that even if an employee has submitted a federal Form W-4 claiming exemption from federal income tax withholding, the flat 37% rate still applies.
Is it Possible to Avoid Paying State Income Tax?
You can legitimately avoid paying state income tax in a number of ways. You are not compelled to pay if you reside in a state without state income taxes. There are a few strategies to avoid having a high tax payment if you reside in a state that does impose state income taxes. Use any state tax credits that you are eligible to get first. Your state tax bill may be greatly reduced with the use of these credits. Visit the website of the Department of Revenue in your state to find out what tax credits are offered to you.
When completing your tax return, you can also use deductions to reduce your taxable income. Operating expenditures, mortgage interest, and specific medical and dental expenses are just a few of the long list of small company deductions.
It is quite permissible to find legal strategies to reduce your tax liability. Tax evasion, on the other hand, is the illegal practice of omitting to pay taxes that are due. Tax evasion carries steep fines, interest charges, and sometimes even criminal prosecution. To avoid these inconveniences, be sure to pay any appropriate state tax bills on time.
Which State Has the Highest Income Tax Rate?
Depending on how much money is made. Depending on the amount of revenue made, some states apply a flat tax while others offer different tax rates. The highest marginal income tax rate in California for the 2021 tax year is 13.30%. However, only income exceeding $1 million is subject to that rate of tax.
How can I make my Income Less Taxable?
By utilizing credits and deductions, you can reduce your taxable income. Creating health savings accounts, funding flexible spending accounts through your company, and making contributions to retirement accounts are all excellent methods to reduce your taxable income (and your tax liabilities).
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