State Revenue Taxes: Every thing You Have to Know

Doing all of your taxes is just like the chore nobody desires to do. In some homes, it’s scrubbing the bathroom bowl. In others, it’s folding laundry. So you place it off. However whenever you lastly do the chore you hate, you normally really feel a way of accomplishment.

So, you completed your federal taxes and also you’re feeling superb. However wait. There’s one other bathroom to clean: your state earnings taxes. Yep, Uncle Sam isn’t ­­the one one who takes a minimize of your paycheck. A complete of 41 states accumulate state earnings taxes and require you to file a state tax return. The quantity you owe relies on how a lot you make and the place you reside.

What Is a State Revenue Tax?

Let’s begin with the fundamentals. A state earnings tax is a tax on any earnings you earn in that state. Fairly easy, proper?

A couple of states haven’t any state earnings tax, however most have both a flat or progressive earnings tax system (extra on these phrases later). So the place does your state earnings tax cash go, precisely? Greater than half of state tax revenues are used to fund schooling and well being care. The remainder of it goes to different companies, like transportation, public help and prisons.¹

How Do State Revenue Taxes Work?

As we talked about above, a state earnings tax is a tax on earned earnings in that state. However how do life adjustments, like taking distant work or transferring to a brand new state midway via the yr, have an effect on your state earnings taxes?

Let’s focus on a number of totally different eventualities that may apply to you:

• You lived and labored in the identical state all yr. You most likely solely must file one state return.
• You lived in a single state however labored in one other (this consists of working remotely). It’s important to pay state taxes on all of your earnings to the state you reside in (if that state has a state earnings tax). You’ll file as a resident for the state the place you reside, and if taxes are withheld by the state the place you’re employed, you’ll file a nonresident return for that state. Usually, you may declare a tax credit score for the quantity paid to your nonresident state, so your earnings gained’t be taxed twice.

If your private home state doesn’t cost a state earnings tax, test your W-2 and see if any state withholdings are listed. If that’s the case, it means state earnings taxes have been withheld out of your earnings. In that case, you’ll must file a return within the state the place you earned your earnings.

• You moved to a brand new state. Transferring to a brand new state can muddy the waters in the case of state earnings taxes. However right here’s the deal: You’ll typically be thought of a state resident for tax functions whenever you spend greater than half of the yr (that’s greater than 183 days, to be actual) residing there. And for those who’re a resident of a state that has a state earnings tax, you’ll sometimes owe taxes to that state on all of your earnings, no matter whether or not it was earned in that state or elsewhere.

You may additionally must file a separate return as a part-year resident in a state (for those who’ve lived there lower than half the yr). It’s also possible to be thought of a nonresident of a state and nonetheless owe taxes. The distinction is {that a} nonresident owes taxes solely on the portion of earnings earned in that state.

Okay, of us. That’s a broad overview of how state earnings taxes work in a number of frequent eventualities. However remember the fact that every state has its personal guidelines about residency, taxes on distant work, and submitting returns. That’s why it’s so necessary to work with a tax skilled who will help you navigate your particular tax state of affairs.

States With Revenue Taxes

As of 2023, there are 41 states within the good ol’ USA which have state earnings taxes. Which means for those who picked a state at random, you’d have an 82% probability of hitting one with a state earnings tax on wages and salaries. And every of these 41 states have totally different tax legal guidelines, so the quantity you owe varies fairly a bit from state to state.

Some states have flat earnings tax charges, whereas others have a spread of charges—referred to as progressive tax charges—the place the charges enhance as your earnings grows. (Extra on flat versus progressive charges in a minute.)

And naturally, there are a number of states with no state earnings taxes in any respect.

States With No Revenue Taxes

There are 9 states with no state earnings tax:

• Alaska
• Florida
• Nevada
• New Hampshire
• South Dakota
• Tennessee
• Texas
• Washington
• Wyoming

Simply since you don’t pay state earnings taxes doesn’t imply you don’t pay something. In spite of everything, your state has to fund their annual finances someway. Many of those states increase cash via different taxes, like gross sales taxes, property taxes and excise taxes on issues like gasoline. However nonetheless, it’s a fairly candy deal to be off the hook for earnings taxes.

New Hampshire is a bit of little bit of a grey space. Whereas it doesn’t have an earnings tax on earned earnings, it does tax curiosity and dividend earnings. However excellent news: New Hampshire is phasing out the tax by 1% a yr starting in 2023 till it’s gone.² Candy!

Now, for those who don’t reside in a state with out earnings taxes or are planning to maneuver to a brand new state, preserve studying . . .

Kinds of State Revenue Taxes

The 41 states that do have state earnings taxes both have a flat or progressive tax construction. Try the variations:

Flat Price

Eleven states have a single-rate earnings tax construction, often known as a flat tax. This merely signifies that everybody pays the identical share of their earnings, regardless of how a lot or how little they earn.

Listed below are the 11 states with flat taxes and their charges for 2023:

• Arizona (2.5%)
• Colorado (4.4%)
• Idaho (5.8%)
• Illinois (4.95%)
• Indiana (3.15%)
• Kentucky (4.5%)
• Michigan (4.25%)
• Mississippi (5.0%)
• North Carolina (4.75%)
• Pennsylvania (3.07%)
• Utah (4.85%)³

We already talked about that New Hampshire is a little bit of a gray space, but it surely’s price repeating: Common earnings will not be topic to New Hampshire’s state earnings tax, however dividends and curiosity earnings are taxed at a flat charge of 5% on quantities over $2,400 a yr ($4,800 for married {couples}).⁴

Washington’s 7.0% flat state earnings tax solely applies to capital positive factors earnings that you simply created from sure sorts of belongings—it doesn’t apply to the remainder of your earnings. You’ll pay this tax on shares, bonds, enterprise pursuits, or different investments and tangible belongings that you simply held for at the least one yr after which bought. There are a number of exceptions—like actual property and belongings held in sure retirement accounts—plus deductions and credit that may cut back the taxable quantity.⁵

Progressive Price

A progressive earnings tax signifies that as you earn extra money, you’ll pay a bigger share in taxes. You’ll be able to work out what share you’ll pay by discovering your tax bracket—that’s a spread of earnings that will get taxed at a selected charge.

At the moment, 30 states (plus Washington, D.C.) have a progressive earnings tax, they usually all do it otherwise. Some states, like Kansas, have simply three tax brackets primarily based in your earnings, however California has 10 brackets and Hawaii has a dozen!⁶ It takes some severe math abilities to determine your tax invoice in a 12-bracket system.

Right here’s a have a look at these 30 states (and the District of Columbia) which have a progressive earnings tax, plus their 2023 tax brackets and charges for single filers. Tax brackets might be totally different for these married submitting collectively, so all the time test together with your state’s tax workplace web site for extra info.

When Are State Revenue Tax Returns Due?

The deadlines for many state earnings tax returns are the identical because the federal deadline. (For 2024, Tax Day is Monday, April 15.) However we’re speaking concerning the authorities right here, so after all, there are a number of exceptions. All the time test together with your state’s division of income for its earnings tax return deadlines. 

Deducting State Revenue Taxes

One small advantage of paying state earnings taxes is which you can get a tax deduction for them in your federal taxes. The state and native tax (SALT) deduction permits you to deduct as much as $10,000 a yr in SALT.⁸ So, the SALT deduction is useful, but it surely’s actually nothing to leap up and down about.

Bear in mind, you may solely use the SALT deduction for those who itemize deductions as an alternative of taking the usual deduction, and about 87% of taxpayers use the usual deduction as an alternative of itemizing.⁹ So for many of us, it’s no SALT for you!

Earlier than the Tax Lower and Jobs Act of 2018 capped the SALT deduction at $10,000 and practically doubled the usual deduction, SALT was a beneficial deduction for those who lived in an space with excessive state and native taxes. This provision is scheduled to run out after the 2025 tax yr, so it’s one thing to control sooner or later.¹⁰

Get Some High quality Steerage on Your Taxes

Hey, we get it. Taxes are onerous. And including a state earnings tax return could make it insufferable. If you’re searching for tax software program to deal with each your federal and state tax returns, take a look at Ramsey SmartTax. It’s easy software program with no hidden charges!

In case you can’t bear to take a look at extra tax varieties, a RamseyTrusted tax professional will help. They’re specialists who know the ins and outs of state-specific tax code so that you don’t have to fret about it.

Discover a professional close to you at present!