Overview of State Taxes
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 taxes, use taxes, and/or property taxes.
State Personal Income Taxes
State 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 ? full-time residents must typically report income from all sources (including out-of-state), while nonresidents are usually only taxed on the income earned in that state.
There are seven states that impose no personal income tax at all ? they are: Alaska, Nevada, Florida, Texas, South Dakota, Washington (State), and Wyoming. Two states, Tennessee and New Hampshire, only impose tax on an individual’s dividend and interest income, not on wages and salaries.
State Corporate and Business Taxes
By definition, a corporation (chartered by the state where it is operated) is considered a unique entity by law, separate from those who own it. In general, domestic and foreign corporations conducting business within a state are subject to that state’s corporate income tax. For multi-state corporations, tax is usually calculated using an apportionment ratio.
Employers are typically required to pay state and federal unemployment taxes (SUTA and FUTA, respectively) as well as workers’ compensation (in the event of injury or illness related to the job). Note that in certain states, only employers with a specific number of employees are subject to these taxes. Other states (including California, Hawaii, New Jersey, New York, and Rhode Island) require business owners to pay temporary disability insurance for their employees, even if the injury or illness is not job-related.
In addition to corporate tax, businesses may 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. However, there are 5 states ? Nevada, South Dakota, Texas, Washington, and Wyoming ? which impose no corporate income tax.
State Sales (and Use) Taxes
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. Certain goods, such as tobacco and alcohol, are often subject to higher sales tax rates. On the other hand, items that are exempt from sales tax often include prescription drugs, medical devices, and food purchased at a grocery store. Oregon, Alaska, Delaware, Montana, and New Hampshire charge no sales tax on most consumer goods.
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. In many cases, the use tax becomes the personal responsibility of the consumer to report.
Local Property Taxes
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. Property taxes can be notoriously steep (costing the average New Jerseyan about 7% of their income) and should be taken into account, along with other taxes, if you are deciding whether or not to live in a particular state.