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What are State Income Taxes?

Updated for Tax Year 2015


OVERVIEW

State Income taxes, which vary by state, are a percentage of money that you pay to the state government based on the income you make at your job. Here are the details.


Introduction

Just like the federal government, states impose additional income taxes on your earnings if you have a sufficient connection to the state. Although each state has the authority to create its own system of imposing the tax, most jurisdictions use a similar structure as the federal government. However, a minority of states impose the income tax at a flat rate on all taxpayers or they don’t even charge the tax at all.

Flat tax rates

Just seven states have a flat tax rate on incomes. These include Colorado, Illinois, Indiana, Massachusetts, Michigan, Pennsylvania and Utah. A flat tax, sometimes called a fair tax, levies the same rate on all income levels. In 2015 for example, the flat state income tax rates ranged from 3.3 percent in Indiana to 5.15 percent in Massachusetts. This means that if you earn $100,000 in Indiana, you only pay $3,300 in state income tax. And if you earn $1 million, you still only pay 3.4 percent or $33,000.

States without an income tax

There are also seven states that don’t impose an income tax at all. These are Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming. The lack of an income tax is not to say that the citizens of these states don’t pay any tax to the state -- residents in each of these states have to pay a variety of other common state taxes including a sales tax, a gasoline tax, a cigarette tax and property taxes. According to data compiled by the Tax Foundation, however, residents of the states with no income tax consistently bear a lower total per capita tax burden than those who live in states that impose an income tax.

Graduated tax rates

The majority of the remaining 36 states and the District of Columbia have an income tax framework that resembles the federal government's. This requires that your income be taxed in various brackets at different rates that increase as your annual income increases. Generally, though, state income tax laws are more simplified than the federal tax code, with fewer tax brackets and lower tax rates. Some states even have tax laws that automatically adjust tax brackets and rates for inflation.

Deducting state income taxes

If you are one of the many taxpayers who pay state income tax, the IRS allows you to claim a deduction on your federal tax return for them. A deduction for state income tax is only available if you are eligible to itemize deductions on your federal return.

Eligibility to itemize your deductions requires your total annual deductible expenses, including your state income tax expense, to be greater than the standard deduction amount for your filing status. In 2015 for example, a single taxpayer can claim a standard deduction of $6,300. Therefore, if you pay more than $6,300 in state income tax, then you are eligible to itemize. If not, then you must have other deductible expenses in addition to state income taxes that total at least $6,301.

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The above article is intended to provide generalized financial information designed to educate a broad segment of the public; it does not give personalized tax, investment, legal, or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business.


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