What is 'State Income Tax'

State income tax is a direct tax levied by a state on your income. Income means income you earned in or from the state and, in your home state, it may mean all your income everywhere. Just like federal tax, state income tax is self-assessed.

BREAKING DOWN 'State Income Tax'

State tax laws, rates, procedures, and forms vary widely from state to state. State filing deadlines also vary but usually, for individuals, state tax day falls on the same day as federal tax day, April 15th.

Taxpayers must file tax returns in each state and in each year they earn an income more than the state’s filing threshold. Many states conform to federal rules for income and deduction recognition. Some may even require a copy of the taxpayer’s federal income tax return to be filed with the state income tax return. 

As of April 2018, seven states had no income tax, two states taxed only unearned income, and 41 states and D.C. had a state income tax. Sadly, avoidance of state income tax by working in a no income tax state is not possible. The tax home will continue tax the income even though earnings were in a no income tax state.

Tax States and No Tax States

Most taxpayers have a tax home where they live and work and file one income tax return in that single state. The filed return is called a resident state income tax return. Taxpayers earning wages or income in a state other than their tax home must file a state income tax return in that state as well. Returns filed in a state where you do not have a domicile will be as a non-resident or part-year resident return. A resident state income tax return must also be filed in the tax home to pay taxes on them there as well.  

Some states have entered into reciprocal agreements agreeing not to tax the same income. If no understanding is in force, and your income will be taxed twice, credits, or deduction, may be available as you file your state income tax return.

Some states impose a state income tax on corporations, partnerships, and certain trusts and estates. These states frequently offer lower corporate rates and special exemptions to attract businesses to locate there. States can not impose an income tax on a U.S. or foreign corporations unless they have a substantial connection, called a nexus. Even then, the income taxes imposed are apportioned and nondiscriminatory and require the meeting of other constitutional standards.

Just like the Internal Revenue Service, states require taxpayers with income that is not subject to withholding, like business or self-employment income, to estimate their annual tax liability and pay it in four quarterly installments. States will impose penalties and interest on taxpayers who fail to file and pay state income taxes on time and in full. Many taxpayers get a measure of relief knowing that states are barred from adjusting their state income taxes once the applicable statute of limitations has expired.

RELATED TERMS
  1. Tax Return

    A tax return is a form(s) filed with a taxing authority on which ...
  2. Tax Base

    A tax base is the amount of assets or income that can be taxed.
  3. Tax Table

    A tax table is a chart that displays the amount of tax due based ...
  4. Annualized Income

    Annualized income is an estimate of the amount of money that ...
  5. Tax Rate

    A tax rate is the percentage at which an individual or corporation ...
  6. Taxes

    An involuntary fee levied on corporations or individuals that ...
Related Articles
  1. Taxes

    Countries with the Highest Income Taxes

    Before you move to one of these countries with the highest income taxes, think through the overall tax situation - and what you get for your money.
  2. Taxes

    Which Countries Have the Highest Taxes on High Incomes?

    These countries charge the highest taxes on high incomes.
  3. Taxes

    How the GOP Tax Bill Affects You

    Here's how the new tax bill changes the taxes you file in 2018.
  4. Personal Finance

    3 Common Tax Questions Answered

    We clarify some rules that often puzzle taxpayers.
  5. Taxes

    Comparing Regressive, Proportional and Progressive Taxes

    Learn about the basic differences between three common tax systems.
  6. Taxes

    States With The Biggest (And Smallest) Tax Burden

    If you're considering moving, here's a list of the states with the highest - and lowest - tax burdens.
  7. Taxes

    5 States Without Sales Tax

    Learn about the five states that do not charge sales taxes and about other taxes the states levy instead in order to generate revenue.
  8. Taxes

    Taxes in New York for Small Business: The Basics

    Learn how small businesses are taxed in New York, and understand how tax rates vary based on whether the business is an S corporation, LLC or partnership.
  9. Taxes

    Overall Tax Burden By State

    Start here, to research states with the heaviest tax burdens. The charts below compare them by income tax, sales tax and property tax.
  10. Taxes

    The 7 Best States For Property Taxes, and Why

    Understand why some states have high property taxes while others have low property taxes. Learn about the states with the lowest property taxes.
RELATED FAQS
  1. What is the difference between a state income tax and a federal income tax?

    Learn the difference between state income tax and federal income tax based on tax rates, deductions, tax credits and taxable ... Read Answer >>
  2. What's the difference between a tax rate and a tax bracket?

    These two terms are often incorrectly used interchangeably. Find out the difference between your tax rate and your tax bracket. ... Read Answer >>
Trading Center