State Taxes

Elizabeth Rosen
by Elizabeth Rosen, Contributor

In addition to the various rules and guidelines surrounding federal tax laws (which are often incomprehensible enough), American taxpayers must also be concerned with their state taxes. Depending on the state, full-time residents (as well as part-time residents and nonresidents) may be subject to personal income taxes, corporate income taxes, sales and use taxes, and/or property taxes.

State personal income taxes are levied in addition to federal income tax, although they generally have lower rates. The state income tax may be a “progressive” tax (the more you earn, the higher your tax rate) or a “flat” tax (all filers are taxed at the same rate, regardless of income). For many states, your state taxable income is based on your federal adjusted gross income (AGI) as reported on your federal income tax return. State filing requirements will depend on your income level and filing status. Additionally, your residency status can affect the amount of income that is subject to state tax.

Domestic and foreign corporations conducting business within a state are subject to that state’s corporate income tax. Businesses may also be liable for property taxes, sales and use taxes, unemployment taxes, and withholding taxes. Corporate taxes are less stable than personal income taxes, because corporate profits tend to fluctuate widely during a regular economic cycle and react strongly to economic conditions.

State sales tax generally applies to the retail sale, use, rental, lease, or consumption of tangible personal property and some services. Sales tax is paid by consumers at the time of purchase and collected by registered vendors. Use tax is a component of the sales tax. It is imposed when proper state sales tax was not collected and it usually applies to out-of-state purchases that are brought into the state.

Property taxes are a major source of revenue for local governments throughout the United States. Property is taxed based on its assessed value, which is determined by county assessors on a regular basis. County treasurers then collect the property taxes and use the revenue to fund public schools, fire departments, road work, and other community services.