What Is State Income Tax?

State income tax is a direct tax levied by a state on your income. Income is what 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.

State tax is required by taxpayers in each state and each year an income more than the state’s filing threshold is earned.

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.