Tips on Handling State Tax
March 8, 2024
State income tax is a direct tax levied by a state on income earned in or from the state. Like federal tax, state income tax is self-assessed, which means taxpayers file required state tax returns. You must file a state tax return for every tax-levying state where you earn income, though only the state in which you live can tax all your income.
Tax laws, rates, procedures and forms vary widely from state to state. Filing deadlines also vary, but for individuals, state tax day usually falls on the same day as federal tax day. Taxpayers must file tax returns in each state and in each year that they earn an income greater than the state’s filing threshold. Many states conform to federal rules for income and deduction recognition. Some may even require a copy of the taxpayer’s federal income tax return to be filed with the state income tax return.
States need the money
Individual income taxes are a major source of state government revenue, encompassing 40% of state tax collections in fiscal year 2020, the latest year the data is available. Sales and excise taxes are indirect payments.
Most states levy some form of income tax. Eleven states have single-rate tax structures, with one-rate applying to all taxable income. The District of Columbia and 30 states levy graduated-rate income taxes. Kansas imposes a three-bracket income tax system; Hawaii has 12 brackets. Top marginal rates range from Arizona’s 2.5% to California’s 13.3%.
In some states, a large number of brackets are clustered within a narrow income band. In other states, the top rate kicks in at a much higher level of marginal income—above $1 million in California, Massachusetts, New Jersey, New York and the District of Columbia.
States’ approaches to income taxes vary in other details. Some states double their single-filer brackets for married filers to avoid imposing a marriage penalty. Some states index tax brackets, exemptions and deductions for inflation, while others don’t. Some states tie their standard deductions and personal exemptions to the federal tax code, while others set their own or offer none at all.
If you live in a state that levies an income tax, avoidance of it by working in a no-income tax state is not possible. Your home state will continue to tax the income even though your earnings were acquired in a no-income tax state.
Just like the IRS, states require taxpayers with income not subject to withholding—business or self-employment income—to estimate their annual tax liability and pay it in four quarterly installments. States will impose penalties and interest on taxpayers who fail to file and pay state income taxes on time and in full.
As for states with no or lower income tax revenue, does this come at another cost? Maybe when it comes to infrastructure and education spending or spending for law enforcement or other public services.
According to the IRS, to determine your main place of business you must consider the length of time you spend in the location, the degree of business activity occurring in the location, and the relative significance of the financial return for each location. Some states, often those that border each other, have entered into reciprocal agreements not to tax the same income. If no understanding is in force and your income will be taxed multiple times, then credits or deductions may be available when you file your state income tax return. If you telecommute, the rules can be even more complex. In such cases, it’s advisable to check with a tax expert before filing your taxes.
The bottom line? State tax situations are complicated! Although the focus is on the IRS, don’t forget to discuss state issues with your Larson & Company tax professional. Please contact us today!
Source: Industry Newsletters ©2024
