While managing federal taxes and dealing with the IRS can be challenging, many Americans also need to consider their state taxes. However, there are exceptions to this rule. Residents of Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming are exempt from worrying about state income tax, as these states do not impose a personal income tax. For everyone else, understanding state tax obligations is crucial.
Despite the additional financial responsibility, there is some relief for taxpayers, as a dozen states have reduced their income tax rates for 2023, allowing individuals to retain more of their earnings. Only a couple of states have raised income tax rates.
States That Reduced Income Tax Rates for 2023
1. Arizona: Transitioned to a flat 2.5% rate from a two-bracket structure.
2. Idaho: Decreased to a flat 5.8% rate from the previous top marginal rate of 6%.
3. Indiana: Trimmed the flat rate to 3.15% from 3.23%.
4. Iowa: Consolidated nine individual income tax rates into four, reducing the top rate to 6% from 8.53%.
5. Kentucky: Lowered the rate to 4.5% from 5%.
6. Michigan: Reduced the rate to 4.05% from 4.25%.
7. Missouri: Cut the top marginal rate to 4.95% from 5.3%, with an increase in the exempt income amount.
8. Nebraska: Decreased the top marginal rate to 6.64% from 6.84%.
9. New York: Lowered rates on specific income brackets.
10. North Carolina: Declined the flat tax to 4.75% from 4.99%.
11. Utah: Reduced the flat rate to 4.65% from 4.85%.
12. West Virginia: Lowered the top marginal rate to 5.12% from 6.5%.
States That Raised Income Tax Rates for 2023
Massachusetts: Introduced a “millionaire’s tax” for income above $1 million, subject to a 4% surtax. Mississippi: Implemented a 5% flat tax starting at $10,001, replacing a graduated tax rate of 0%, 4%, and 5%.
Who Needs to File a State Tax Return?
If a state imposes an income tax, there are two scenarios that mandate filing a return:
- Residency: If you are a resident of the state.
- Income Earned in the State: If you earn income in a state where you are not a resident, such as rental income from a second home or income earned by professionals working in different states.
It’s essential to file a tax return for each state where you earn income, and you may also need to report that income in your home state return. However, your home state typically allows you to take a credit for taxes paid to another state on the same income.
State Tax Audits
States conduct tax audits similar to the IRS, and misreporting data, math errors, incomplete forms, excessive deductions, or failure to file state tax returns can trigger an audit. States have various rules, so understanding the specific regulations in your state is crucial. State audits typically involve communication via mail, requesting additional information and providing instructions on how to proceed.
Does a State Audit Mean an IRS Audit?
While not automatic, a state audit may lead to an IRS audit, as state tax departments often communicate with the IRS, and some information on both returns is the same.
State Tax Due Dates
Most states generally follow federal guidelines, with a deadline around April 15. However, due dates can vary, so it’s essential to check with the specific state. If a state does not have an income tax, there is no deadline to consider.
Navigating state income taxes requires a thorough understanding of state-specific regulations, as well as staying informed about recent rate changes and filing requirements. Keeping track of these details ensures compliance and can contribute to optimizing your tax situation.