OVERVIEW

State taxes, which vary by state, are a percentage of money paid to the state government based on the income you earn from your job. Here are some details.

Introduction
Like the federal government, states impose additional taxes on your earnings if you are sufficiently tied to the state. Although each state has the authority to create its own tax system, most jurisdictions use a structure similar to that of the federal government. However, a minority of states either set the income tax at a single, flat rate for all taxpayers or do not even levy the tax at all.

Single income tax rates
Only eight states have a single income tax rate. These are Colorado, Illinois, Indiana, Massachusetts, Michigan, North Carolina, Pennsylvania, and Utah. A single rate tax, sometimes called a fair tax, taxes all income levels at the same rate. In 2020, for example, single flat income taxes had rates from 3.07% in Pennsylvania to a 5.25% rate in North Carolina. This means that if you make US$100,000 in Pennsylvania, you only pay US$3,070 in state taxes. And if you make US$1 million, you still pay 3.07 %, or US$30,700.

States without an income tax
There are also seven states that do not have an income tax at all. These are Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming. The lack of an income tax does not mean that citizens of these states do not pay taxes to the state. Residents in each of these states have to pay a variety of other common state taxes, including a sales tax, gasoline tax, cigarette tax, and property taxes. However, according to data compiled by the Tax Foundation, residents of states that do not have an income tax always have a lower per capita tax burden than those who live in states that do.

Graduated tax rates
Most of the remaining 36 states and the District of Columbia have an income tax system that resembles that of the federal government. That means your income will be taxed at different rates that increase as the scale of your annual income increases. In general, though, state income tax laws are simpler than the federal tax code, with fewer tax brackets and lower rates. Some states have tax laws that automatically adjust tax scales and rates according to the inflation index.

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

To determine whether you can itemize your deductions, your deductible expenses for the year, including your state taxes, must add up to more than the standard deduction for your filing status for the current tax year. For example, in 2020, a single taxpayer can claim a standard deduction of $12,400. Therefore, if you pay more than $12,400 in state taxes along with other itemized deductions, then you will be eligible to itemize your deductions. Otherwise it may be more beneficial to claim the $12,400 standard deduction.

Beginning with the 2018 tax year, the deduction for state and local taxes, including state income taxes, is limited to $10,000 per year. For years prior to 2018, this deduction is not limited, although if you claim a substantial amount of state and local taxes, you may be subject to the Alternative Minimum Tax.