State income tax basics

Chris Bibey
by Chris Bibey

 

Every year, American taxpayers are required to file and pay both federal and state income taxes. However, some taxpayers get so caught up with the federal tax system that they overlook their state income taxes. Your state government (just like the federal government) imposes tax on earned income. While the federal income tax system encompasses the entire country, state income taxes generally only apply to the income of residents, as well as any state-sourced income earned by nonresidents.

State income taxes are administered separately by each state. Some states have a Department of Revenue that imposes and collects taxes; others have a Division of Taxation or State Comptroller to enforce tax laws. Some states also impose higher income tax rates than others. At this time, there are 7 states that have no income tax. They include: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. These states employ other taxes (sales and use, business/corporate, etc.) to generate tax revenue that would otherwise come from an income tax. Keep in mind that living in a state with no state income tax does not mean you are exempt from paying federal income tax to the IRS.

Tennessee and New Hampshire, on the other hand, are 2 states that only impose tax on the income from interest and dividends. The majority of states have a progressive income tax system. This basically means that the more money you make, the more tax you pay. This idea is similar to the federal income tax system, but the state tax rates tend to be much lower. Illinois currently has the lowest state income tax rate at 3%. Illinois imposes a flat tax, which means that everyone’s income is taxed at the same rate regardless of how much they earn. Other states with flat income tax rates include Colorado, Indiana, Massachusetts, Michigan, Pennsylvania, and Utah. On the other end of the spectrum is Hawaii, which has a 12-bracket progressive income tax and the highest state rate of 11%.

So how do you pay your state income taxes? As noted above, your state income tax is not levied or collected by the IRS ― state income tax is administered on the state government level. For the majority of taxpayers, state and federal income taxes are automatically deducted from each paycheck (like a “pay-as-you-go” system). Those who are self-employed, however, will need to submit their state income tax on a quarterly basis. You may have the ability to file and pay your state income taxes online, depending on your particular situation (i.e., how much money you earn and what state you live in). Electronic filing reduces paper waste, and it can save you time and money. Reporting your state income and paying state income tax are just as important as filing your federal income tax with the IRS. Visit your state’s official website for more information about the state income tax laws that affect you.