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. In your state of residence, it may mean all your income everywhere. Like federal tax, state income tax is self-assessed, which means taxpayers file required state tax returns.

Key Takeaways

  • As of 2021, 41 states and Washington, D.C., impose an income tax.
  • State tax laws, rates, procedures, and forms vary greatly among the states.
  • You must file a state tax return for every tax-levying state in which you earn income, though only the state in which you live can tax all of your income.

Understanding State Income Tax

Tax laws, rates, procedures, and forms vary widely from state to state. Filing deadlines also vary, but for individuals, state tax day usually falls on the same day as federal tax day, which is typically April 15th. However, state filing deadlines were updated for the 2019 tax year due to COVID-19 and some states have already adjusted the tax filing deadline for tax year 2020.

The IRS has extended the 2020 federal tax filing date for individuals until May 17, 2021, due to the COVID-19 pandemic—versus the previous deadline of April 15, 2021. As well, due to the winter storms that hit Texas, Oklahoma, and Louisiana in February, the IRS has delayed the 2020 federal individual and business tax filing deadline for those states to June 15, 2021. However, the extra time is only for federal returns and not for state returns.

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 January 2020, seven states have no income tax (Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming), and two states tax only unearned income (Tennessee and New Hampshire, but those states will end the practice as of 2022 and 2025, respectively).

Forty-one states and Washington, D.C., do have a state income tax. If you live in a state that levies an income tax, avoidance of it by working in a no-income-tax state is not possible. Your home state will continue to tax the income even though your earnings were made in a no-income-tax state.

Just like the Internal Revenue Service, states require taxpayers with income that is not subject to withholding, such as 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.

If you have income that is not subject to withholding, such as business or self-employment income, you must estimate your annual tax liability and pay it to the state in four quarterly installments.

Special Considerations

Most taxpayers live and work in a single state and file a resident state income tax return there. However, taxpayers who earn wages or income in one or more states other than where they live may be required to file state income tax returns in those states as well, unless, of course, a state is a no-income-tax state.

If, for example, you are an actor living in Jersey City, N.J., and you work Off-Broadway in New York City, do TV or movies in Los Angeles, and play a regional theatre gig in Chicago, you must pay taxes in the states of New Jersey, New York, California, and Illinois. Furthermore, your tax home is wherever you earn the majority of your income, which, considering the salaries Off-Broadway and in regional theatre, is probably California, even though you live in New Jersey and may have had more work during the year in New York and Illinois.

Returns in a state where you do not have a domicile will be filed as a nonresident or part-year resident. Some states, often those that border each other, have entered into reciprocal agreements not to tax the same income. If no understanding is in force and your income will be taxed multiple times, credits or deductions may be available as you file your state income tax return. If you telecommute, the rules can be even more complex. In such cases, it's advisable to check with a tax expert before filing your taxes.

Depending upon the residency rules of the home state, expats may also still have a state filing requirement.

Some states impose an 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 cannot impose an income tax on a U.S. or foreign corporation unless it has a substantial connection, called a "nexus."

Requirements for a nexus are different among the states, but they generally include earning income in the state, owning or renting property there, employing people there, or having capital assets or property in the state. Even then, the income taxes imposed are apportioned and nondiscriminatory and require the meeting of other constitutional standards.