This guide will walk you through some of the basics of filing your state income tax return, including things you might need to add or subtract, complications you should be aware of, and tips for making the whole process easier.
Filing state taxes requires a separate return
The federal government and your state government are two separate entities, so you’ll need to file your state income tax return separately from your federal 1040.
Since much of the information on your federal and state tax returns will be the same, the first step when filling out your state return is to enter all the relevant information from your completed federal form.
After you’ve filled in the details from your federal return, you can start making adjustments to your state return based on how much you’ll need to add back or subtract, according to your state’s tax laws.
Additions for state taxes
Additions to your state tax return are typically either deductions from your federal return that are not deductible at the state level or federally tax-exempt income items that states consider taxable. Some of these additions could include:
- Interest on student loans.
- Interest on out-of-state municipal bonds.
- "Bonus depreciation," which allows a business owner to deduct a big chunk of the cost of supplies, equipment or other major purchases right away.
Subtractions for state taxes
Subtractions from your state tax return are usually related to income items that are taxed under federal law but tax-exempt at the state level, or to state-specific deductions. Some things you might be able to subtract from your state income tax return include:
- A deduction for federal income taxes you paid, if your state has this write-off.
- Contributions to the state’s 529 college savings plan.
- Federal taxes on Social Security or other retirement benefits.
- State income tax refunds.
- State lottery winnings.
State-specific tax laws
The state you live in might also have its own unique tax laws that could work to your advantage. For example, any resident of New Mexico who is over 100 years of age is exempt from paying state taxes.
Since the IRS is not involved in the administration of state taxes, the best place to go for information regarding state-specific tax laws and deductions is the website of your state’s Department of Revenue or Department of Taxation.
When you use tax software, your provider will usually ask if you’d like to work on and file your state return once you’ve finished with your federal taxes. Typically there’s an additional charge, though Credit Karma will file both your federal and state tax returns for free.
You might need to file individual returns for multiple states
If filing separate returns for your federal and state income taxes doesn’t sound complicated enough, you may need to file additional state tax returns if you moved or worked in more than one state during the tax year.
Working remotely for a company in another state won’t require you to file returns for both places, but if you physically commute to another state for work, things aren’t so simple.
Reciprocal tax agreements
Some states have reciprocal tax agreements with one another, so if the state you commute to for work has an agreement with the state you live in, then you should have to file a return only for your home state.
Currently 16 states and Washington, D.C., have these reciprocal tax agreements with their neighbors. If yours isn’t one of them, you’ll have to file separate state tax returns for both the state where you work and the state where you live.
Many of the states with reciprocal tax agreements have special forms you’ll need to fill out as part of the arrangement, so it’s a good idea to check the website of your state’s tax agency for more information.
And, make sure to find out whether you need to submit a state withholding exemption form with your employer, to make your wages tax-exempt in the state you work in if you live elsewhere.
You might need to file local tax returns, too
Depending on where you live, it’s also possible that you’re subject to municipal taxes that will require you to file additional returns.
For example, many parts of Ohio have school district taxes that require their own returns in addition to the standard state income tax return, and some Ohio municipalities have city-specific taxes, too. So if you’re an Ohioan, you could potentially be required to submit a state return and a couple of local returns.
Failing to file a required state or local return could lead to penalty fees, interest charges and possibly even jail time, so it’s important to understand the tax requirements where you live.
State income tax refunds may be taxable
Depending on whether you itemize deductions or take the standard deduction on your federal income tax return, any state income tax refunds you receive may draw scrutiny from the IRS.
If you itemized last year, took a deduction for state and local taxes, and received a refund or credit on those taxes, you’ll need to claim that money as income — subject to federal taxes.
If you opted for the standard deduction on your federal return instead of itemizing, or if you itemized but did not deduct state and local taxes, your state refund is not taxable and you don’t need to claim it.
How much do you owe your state?
To figure out the amount you owe in state income taxes you’ll need to calculate your gross state tax liability, which is your total taxable income minus state tax deductions and credits.
The percentage of your earned income that’s taxable depends on the state where you live and the amount of income you earn.
Flat income tax rates
For the 2019 tax year, nine states have a flat income tax rate, meaning everyone pays the same rate regardless of how much money they make. These states include:
- Colorado - 4.63%
- Illinois - 4.95%
- Indiana - 3.23%
- Kentucky - 5%
- Massachusetts - 5.05%
- Michigan - 4.25%
- North Carolina - 5.25%
- Pennsylvania - 3.07%
- Utah - 4.95%
Progressive income tax rates
If you don’t live in one of the nine states listed above, your rate will be based on a progressive tax structure, similar to the federal one. Basically, as you earn more income, the higher amounts are dropped into buckets, or brackets, and are taxed at higher rates.
Tax brackets can be complicated, but this article features a handy table that will help clear things up.
Deductions and tax credits
Once you’ve calculated your total taxable income based on your state’s flat or progressive tax rate, you can subtract any state-specific deductions and tax credits you qualify for.
Most state tax credits will at best reduce your liability, but a few refundable credits like the earned income credit and the child and dependent care credit may put some money back in your pocket.
Tax credits vary from state to state, so you should check the website of your state tax agency to see what’s available for you.
E-filing your state return
Although your federal and state tax returns are separate documents going to separate agencies, if they are filed electronically using the same tax software or other e-filing service, they’ll be linked together under a single submission ID.
This makes it easier for both the IRS and your state to verify your identity and will help to ensure that your state tax return is accepted on time.
A recent change in tax policy now prohibits state tax returns from being e-filed on their own, so if you’re planning to file your state return electronically you’ll need to include it with your federal return.
An easier way to file your state taxes
As you can see, there are a lot of steps involved with filing your state income tax return, and a lot of variables that can make the process more complicated.
Filing your state return on your own with tax software can make things much simpler.
But if you want to save yourself some time and not handle preparing and filing your state tax return on your own, consider hiring a tax preparation expert from H&R Block to do it for you.