What are State Income Taxes?

State Income taxes are a percentage of money that you pay to your state. These taxes vary state by state, and should be paid in addition to your federal income taxes. Generally speaking, state income taxes will be significantly smaller than federal income taxes, and a handful of states don’t even charge these taxes at all.

State income taxes generally apply to you if you live in (or have strong connections with) a certain state. Each state is authorised to impose its own system for taxation, though the majority (36 states) have a progressive graduated tax system similar to the federal tax system, where you are put in a “tax bracket” and your income is progressively taxed at different rates as your salary increases and reaches higher tax brackets. The District of Columbia is included as one of these “states”.

States with flat tax rates

Though most state taxes use a progressive graduated tax bracket system (similar to the federal government), a total of 8 states have a flat rate on taxes. This means that the state charges the same percentage to everyone, whether they earn $5,000 per year or $500,000 per year. For example, Pennsylvania charges a flat rate state tax of 3.07% across all of its taxpayers. Therefore, someone earning $5,000 would pay $153.50 in state taxes, whereas someone earning $500,000 would pay $15,350 in state taxes.

The 8 states that charge flat rates are Colorado, Illinois, Indiana, Massachusetts, Michigan, North Carolina, Pennsylvania, and Utah. All of these states charge differing flat rates. As of 2017, this ranges from 3.07% in Pennsylvania to 5.99% in North Carolina.
States without state income taxes

A total of seven states do not charge state taxes at all, making them tempting locations for high earners. These states are Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. Though the residents here don’t pay money to their states directly, their states still indirectly collect money via sales tax, gasoline tax, a cigarette tax and property taxes. Despite this, data suggests that these citizens will still pay less to their state governments overall.

The deduction of state income taxes

Currently, the IRS allows you to claim a deduction on your federal tax return for state income taxes. This is only available, however, if you are eligible to itemize deductions on your federal tax return. This means (in 2017) that you are eligible to itemize if you pay more than $6,350 in state income taxes.

The deduction of state income taxes means that you’ll effectively pay less in federal taxes. For example, if you earn $200,000 and pay $10,000 in state taxes, the federal government only taxes you on the other $190,000 of your income. However, it is looking likely that this may change soon under the Trump administration, and it is likely that more and more states will look to secure state taxes in other ways, so as not to deter would-be or current state residents.