Out of all the states in the United States, 43 states charge a tax to individuals on their income. The state income tax is over and above the federal income tax. In this article, we try and understand state income tax in greater detail.
This guide to State Tax calculations is based on example rates and thresholds, the latest US Tax Tables (2024 Tax Tables) for each state are available here.
State income tax is calculated either at a progressive rate or a flat rate of the taxable income. Different states have different state income tax rates. Of the total states, 36 states have a progressive tax structure, just like the federal government. This means as the income of an individual increases, the tax payable increases. Examples of these states include Alabama, Arizona, Arkansas, California, among others.
Example 1: Alabama has three different slabs for state income tax with different rates. Income thresholds for these slabs are different for single filers and couples. For single filers with income of between $0 and $500, the tax is 2%. For income between $500 and $3,000, the tax is 4%. And for income above $3,000 the tax is above 5%.
For married couples, the tax is 2% for income between $0 and $1,000. For couples with income between $1,000 and $6,000, the tax is 4%. And for couples with income above $6,000, the tax is 5%.
The state that allows the maximum income without paying any taxes is South Carolina, which charges no tax on the first $2,880 of an individual's income. In other states, state taxes are applicable at any income above $0.
Out of the total states in the US, 9 states do not charge any state income tax to individuals. These states are listed below.
However, some of these states do impose a tax on few types of personal income. For example, New Hampshire has a 5% tax on interest and dividends.
Of all the states, 8 states charge individual state income tax at a flat rate irrespective of the income. The states and the tax rates for 2014 are listed below.
In most states, taxpayers can benefit from a standard deduction or other types of itemized deductions.
Example 2: Arizona allows a standard deduction of $4,695 for single filers and $9,833 for couples. Additionally, it allows a personal exemption of $2,100 for single filers and $4,200 for couples. California allows a standard deduction of $3,906 for single filers and $7,812 for couples.
For tax calculations, many states allow their own tax credits, similar to federal tax credits.
Example 3: Delaware allows a state income tax credit of $110 for individual filers, $220 for married couples and $110 for dependents.
States cannot charge taxes on any income from federal bonds. Also, the majority of states do not impose a state income tax on any interest income earned from bonds issued by their own state, including both state and local municipal bonds. Also, in many states, there is no income tax on some amount or the entire amount of Social Security benefits.
When calculating federal income tax, amount paid towards state income taxes can be deducted. However, these deductions are available only for those who are allowed to itemize deductions on their federal return.
In order to be eligible for itemizing deductions, your total annual deductible expenses should be higher than the standard deduction amount for your respective filing status.
Example 4: For 2014, the standard deduction allowed for a single taxpayer is $6,200. So if you pay state income taxes of more than $6,200, you can itemize the deductions. Otherwise, the total of your other deductible expenses, in addition to state income taxes, should be a minimum of $6,201.
All states have a self-assessment system for income taxes. This means, individuals are required to file tax returns every year if their income goes above the taxable income limits set by the state.
For a high number of taxpayers, there's an automatic deduction of income taxes from their paycheck. Each state has its own deadline for filing of returns. However, in most states the deadline for filing of state tax returns is April 15th, which is the same as the deadline for filing federal tax returns. Depending on your state, you can file your state tax returns online. A lot of states want taxpayers to attach a copy of their federal income tax return with their state income tax returns.
If you are self-employed, you need to submit your state tax returns every quarter.
All states have a state taxing authority. State income taxes are not collected by the Internal Revenue Service (IRS) but the respective taxing authority in the state. This body is allowed to check and adjust any returns filed with the state. Almost all tax authorities allow appeals for audits. And in almost all states, taxpayers can go to court if there is a disagreement with the tax authorities.
In every state, there is a penalty for not filing the necessary tax returns or not paying taxes on time. Also, in all states there is an interest on any delayed tax payments. Interest is also due on any additional taxes that may become due after any adjustments made by tax authorities.
Nearly all states have put in place a statute of limitations that prevent the state from any tax adjustments after a certain period of filing tax returns.
Example 5: California, Arizona, Kentucky, Michigan, Ohio and Wisconsin have a limit of 4 years to audit the returns of taxpayers, after the filing of the return or the due date of the return. Louisiana and New Mexico have a limit of 3 years after December 31st of the year of filing returns or the year after when the tax is due.
In nearly all states, the tax on capital gains and dividend income is similar to any other income from investments. Individuals who are non-residents of the state do not have to pay any state income taxes related to capital gains or dividend income.
The states that charge an income tax for individuals impose a tax on the entire taxable income of the residents of their states. If such residents pay taxes to other states, they are given a credit to avoid double taxation. In the majority of states, non-residents of the state have to pay tax on any income generated in the state.
To know more about state income taxes in detail, you should check the tax website of your state.
Use our state tax calculator to calculate your state income tax liability.