Picture it: early spring. Flowers are blooming, the weather is warming up, and you just finished filing your federal income tax return. It feels good, right? Now you can sit back, relax, grab an iced tea, and go back to living your best life.
But wait—you might not be done. You might need to file state income taxes. Yeah, that’s right. Unless you’re lucky enough to live in one of the seven states that don’t have a state income tax, you have to file your state income tax return too.
Just when you thought you were done—they pull you back in!
Okay. Deep breath. Yoga breath. Let’s do this.
What Are State Income Taxes?
There are 41 states plus the District of Columbia that require their residents to pay income taxes on wages and salary in addition to their federal income taxes. Each state does it differently, so depending on where you live, you’re going to pay a higher or lower percentage of your income in state taxes.
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Some states have flat income tax rates, while others have a range of tax rates, where the highest rates don’t kick in until you reach a certain upper-income level. And there are others with no state income taxes at all.
States With No Income Taxes
There are seven states with no state income tax:
- South Dakota
Just because you don’t pay state income taxes doesn’t mean you don’t pay anything. Many of these states raise money in other ways, like sales taxes, property taxes and excise taxes on things like gasoline. But still, it’s a pretty sweet deal to be off the hook for income taxes.
There are two other states worth mentioning: Tennessee and New Hampshire. They don’t tax wage income, meaning they don’t deduct taxes from your paycheck, and you don’t have to file an income tax return based on your hourly wages or salary.
But they do tax interest and dividend income. For now, anyway. Tennessee is in the process of phasing out its “Hall Income Tax.” For the 2019 tax year the rate is 2%, going to 1% in January 2020, and will be completely repealed on January 1, 2021.1
New Hampshire has a 5% tax on interest and dividend income over $2,400 in a year ($4,800 for married couples).2
Basically, if you live in one of these states, you can stop here.
For everyone else, keep reading . . .
States With Flat Income Tax Rates
There are nine states that have a single-rate income tax structure, also known as a “flat tax.” This just means that everyone pays the same percentage of their income, no matter how much or how little they earn. These states are, from West to East:3
- Utah (4.95%)
- Colorado (4.63%)
- Illinois (4.95%)
- Indiana (3.23%)
- Kentucky (5.00%)
- Michigan (4.25%)
- North Carolina (5.25 %)
- Pennsylvania (3.07%)
- Massachusetts (5.05%)
States With Progressive Income Tax Rates
A “progressive” income tax rate means that the more money you earn, the higher your tax rate. The remaining states (plus DC) all have this kind of income tax structure, and they all do it differently. Some states, like Kansas, only have a few tax brackets, while states like California (10) and Hawaii (12) have a lot of tax brackets.4 The lowest top marginal rate—this refers to the highest percentage a taxpayer has to cough up—is North Dakota’s at 2.9%, and it kicks in once you make $433,200 (for both single filers and married couples). The highest is—as you might expect—California’s at 13.3%, which kicks in at $1 million ($1,145,960 for married couples).5
Deducting State Income Taxes
Can you deduct your state income taxes from your federal taxes? In the past, you were able to deduct everything you paid in State and Local Taxes (SALT) from your federal income taxes. That changed, however, with the Tax Cut and Jobs Act of 2018.
Now, the IRS has severely limited its SALT intake, capping the deduction at $10,000 in a given tax year.5 If you live in one of the states with high state and local taxes, this could put a cramp in your style, especially if you itemize your taxes (the larger standard deduction included in the tax reform bill should limit the damage for people who don’t itemize). This provision is currently scheduled to expire after the 2025 tax year, so it’s something to keep an eye on as new changes to the tax code are hashed out in the future.
Get Some Quality Guidance on Your Taxes
Like a lot of things in this world, taxes are complicated and time consuming. Adding a state income tax return to the tax season makes it even more so. If you have a simple return and want to try filing on your own, check out RamseySmartTax.
If your return is more complicated, our tax pro Endorsed Local Providers (ELPs) can give you the help you need so you don’t pay more taxes than you have to. And if you’re getting a huge tax refund, they can help you figure out how to adjust your withholdings so you get more money in your paycheck every week without owing a bunch of money come tax time.