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State Income Tax

Learn about state income tax and the rates for different states.

State income taxes are often taken out of an employee's paycheck. [©Jupiter Images, 2010]
©Jupiter Images, 2010
State income taxes are often taken out of an employee's paycheck.

State income tax, also known as personal or individual income tax, is the revenue a state collects from its residents' income. This tax is typically used to pay for public schools, police, and firefighters. Income is just one of many ways a state raises revenue. States also collect sales tax, property tax, license tax, estate tax and excise tax. In addition to state income tax, American citizens pay federal income tax and payroll taxes, such as Social Security and Medicare.

State income tax is based on an individual's taxable income, which includes not just salary from a job, but all taxable income sources, such as from stocks and retirement savings accounts. The amount of taxes due is calculated in various ways depending on the taxpayer's income bracket, personal exemption, standard deductions and other parameters.

Seven states do not collect any income taxes: Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming. Two states collect only income taxes on dividend and interest income: New Hampshire and Tennessee. In light of the economic downturn, some states are reconsidering their tax systems such as raising percentages on tax brackets or instituting an income tax if they don't already have one.

In addition to education and civil services, such as police and firefighters, states allocate funds to a number of state-funded programs, ranging from mental health care and substance abuse programs and Medicaid, to education grants and tuition scholarships and environmental protection.

How State Income Tax Is Derived

Each state calculates its income tax differently. For some states, the tax percentage rate is a flat rate across all income levels. For example, Colorado charges a flat 4.63 percent. Other states have a progressive tax in which the tax rate is divided among income brackets; the lower the income, the lower the percentage of taxes owed, the higher the income, the higher the percentage.

Illinois has the lowest flat rate tax at 3.0 percent for everyone, regardless of income level. California has the highest tax rate of 10.3 percdent for its highest tax bracket for persons with incomes over $1 million. Missouri has 10 brackets spread among all income levels, the largest number of any state. The Federation of Tax Administrators offers a chart of each state's income tax rate. The organization also offers tax forms for each state.

State income tax is taken out of a person's paycheck and is submitted by the employer. People who are self-employed or contract workers must pay an estimated income tax on a quarterly basis. Unemployment compensation is not subject to income tax. Tax policies vary if an individual works in one state and lives in another.

Tax Refunds and Exemptions

As with federal income tax, state income tax rules provide for refunds if an individual paid more taxes than they owed. Generally if a person files tax returns by paper, they will have to wait longer—possibly up to 90 days—for a refund than if they had filed electronically. Electronic filing returns refunds in as little as two weeks. You can get your refund quicker if you sign up for direct deposit. Taxpayers can check on the status of their refund by calling a hotline or checking a Web site set up by the state's revenue service office.

According to an article by Reuters, during the recession several states, such as Missouri, North Carolina and California, reported a drop in gross tax collections and delayed paying tax refunds to taxpayers.

Persons paying state income tax may be eligible for various exceptions, such as personal exemptions, deductions, subsidies, earned income tax credits, installment agreements, number of allowances you claim, application for filing extensions and programs to reduce tax payments for low income payers. Each person's situation is unique, so consult a tax professional for advice to see if you qualify for any tax discounts or exemptions. In addition, if you have accrued any tax penalties for late payments you may be able to receive a penalty abatement.

One example on how to save on state income tax is to enroll in that state's section 529 college savings plan. Some states offer tax deductions for contributions to the plan, and some states have limits on the amount of the deduction.

Consideration of State Income Tax

Many people take into consideration the tax rate of a particular state if they plan to move. States with a high tax rate may not be a favorable destination if a person has the choice of where to move. States with a low tax rate or no income tax are more popular choices, especially for retired seniors. For instance, Florida has no income tax and is host to millions of retirees. The states climate doesn't hurt either. Nevada has no income tax and also gets much of its state funding from the taxes paid by the gambling industry.

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