Not all states have an income tax, but for those that do, it’s a good idea to be prepared.
Where to Start with State Income Taxes?
The starting point for most state income tax returns is your federal return. You will want to ensure that your federal return is accurate and complete before you begin preparing your state return. This should not be a challenge as you have many options for assistance, some of which are free.
Adjusting Your Federal Income for State Income
Start making adjustments after entering your federal tax return information on your state tax return. You will need to reconcile the differences between federally taxable income and state taxable income.
Additions for State Taxes
Common additions to federally taxable income in the state include:
- Additional investment consumption
- Municipal bond interest from other states
- Moving expenses
- Student loan benefits
Deductions from State Taxes
Common deductions from federally taxable income in the state include:
- Deduction for federal income taxes, if your state offers this deduction
- Contributions to your state’s 529 college savings plan
- Social Security and other retirement benefits that are federally taxable
- State income tax refunds
- State lottery winnings
Calculating Your State Tax Liability
You will find your total state tax liability after calculating your taxable income for state income tax purposes.
Nine states have a single flat tax rate. All taxpayers in these states pay the same percentage of income regardless of how much they earn:
- Colorado
- Illinois
- Indiana
- Kentucky
- Massachusetts
- Michigan
- North Carolina
- Pennsylvania
- Utah
Two additional states impose a flat tax on certain income. New Hampshire has a flat tax on interest and dividends only, while Washington’s flat tax applies only to capital gains for high-income individuals.
However, most states follow a progressive tax system similar to the federal government, where tax rates increase as income rises. You will need to use a table to compute your tax in these states.
State Income Tax Credits
You can reduce your state tax liability through any state income tax credits for which you qualify. State tax credits can vary significantly, but many states have their versions of child tax credits and earned income credits.
Most tax credits can only reduce your tax liability to zero. They are treated as a payment toward any tax owed. However, some credits are refundable. Any remaining balance after tax payment will be sent to you as a tax refund.
How to File Your State Tax Return
Preparing and filing your state income tax return electronically is the preferred method for tax compliance. You will get a more accurate return if you use tax preparation software, and you will receive your refund faster if you file electronically and choose direct deposit instead of mailing a check from the IRS.
State websites typically have lists of free software programs you can use. Paid tax programs, such as TurboTax, usually include state tax return preparation for most states. Check the list of states available with the product you are considering purchasing before buying the software to ensure your state is included.
Let’s take a look at an example of a state income tax return. For New Jersey, you can file your tax return after filling out Form NJ-1040. New Jersey residents must fill in their personal information, filing status, exemptions, and dependents, followed by income. The total statewide income is placed on line 29. After deductions, the taxable income is placed on line 42. After filling in the rest of the form, you will see the tax owed on line 54. There are several other lines to fill out on the form – New Jersey Form 1040 consists of four pages – and you can find addresses to send the form at the end.
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Each state has its own specific 1040 form for its residents. You are likely to find your state’s income tax forms on your state’s income tax website.
Frequently Asked Questions
How to file an extension for state taxes?
If you need more time to file your state income tax return, you should first contact your state’s tax authority. Call or visit your state’s website to find out which forms you will need to submit. Each state will have different requirements. Your state may issue an automatic extension, but it’s important to double-check as you could face penalties if you make a mistake.
What happens if you don’t file your state tax return?
If you owe state taxes and do not file your return, you will face penalties, fees, and interest in addition to the taxes owed. If you fail to file the return due to fraudulent attempts, you may also face jail time.
How to file taxes in another state?
If you live in one state and work in another, check if your state has a tax reciprocity agreement with neighboring states. If so, you may only need to file taxes with your home state. Otherwise, you may need to file a non-resident income tax return with the state you worked in. If you moved from one state to another during the year, you will need to file part-year tax returns for multiple time periods: one for the state you lived in previously and one for the state you currently live in.
Source: https://www.thebalancemoney.com/how-to-prepare-your-state-tax-return-3193324
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