What Are State Income Tax Rates for 2023? | Beem

State income tax is like a sidekick of federal income tax, it’s similar but different in some states. Some states have their own rules, but most follow the federal government’s structure. However, a minority of states impose the income tax at a flat rate on all taxpayers or they don’t even charge the tax at all.

How State Income Tax Works

This is a tax that’s applied to the money you earn, and it’s something that 42 of the 50 states in the US have. Now, your employer is typically the one who takes care of collecting this tax from your paycheck, but it’s ultimately up to you to file your income tax returns and pay any taxes that you owe.

Now, you may be wondering what this money is used for. Well, states use the money from state income tax to pay for various government services such as education, healthcare, transportation, and even programs to help people with low incomes. The amount of tax and the uses of tax revenue can vary from state to state because it is set by the state legislative bodies. 

Most states have graduated tax brackets, some have a flat tax, and eight have no income tax. New Hampshire only taxes interest and dividend income. State income tax is withheld from paychecks by employers and sent to the state’s Department of Revenue. Nevada does not have an income tax and generates revenue from other taxes such as sales and use tax and gaming percentage fee tax. Employers are responsible for deducting the correct amount of withholding from an employee’s paycheck, including state income tax. Self-employed individuals must pay their own state income tax.

So, while it may be a bit of a bummer to have to give up some of your hard-earned cash, just remember that it’s all going towards making the state a better place to live

Flat Tax Rates

In states that have income taxes, some people pay a lower rate as their income increases, but this is not the case in 10 states that have a flat tax rate that applies to all income levels. These states try to keep their tax system simple by applying the same rate to all income. However, the definition of income and the way it is calculated can vary between states. For instance, New Hampshire does not tax regular income but applies a flat rate to dividends and interest. Also, some states calculate the tax based on taxable income, while others use adjusted gross income.

States That Don’t Have Income Tax

Eight states don’t have any state income tax. These are Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming. New Hampshire will also join this list in 2027, it currently taxes only on investment income and interest but not on earned wages.

States With a Graduated-Rate Income Tax

Some states have a graduated income tax where the amount of tax you pay increases as your income increases. These types of taxes are common and the rates can vary. For example, in California, if you make over $1,000,000 and file as a single taxpayer, you pay a 13.3% state income tax. However, if you make less than $9,325, you pay a 1% state income tax. Other states such as Alabama, Arizona and Connecticut also have a graduated-rate income tax.

How To File State Income Tax

To file state income taxes, first, you need to file federal income taxes as many state income tax returns use the federal adjusted gross income as a starting point. State income taxes are separate from federal taxes, and each state has its own way of filing them. You can find more information about how to file state income taxes on your state’s Department of Revenue website. Additionally, the IRS website also has a comprehensive list of state income tax filing information.

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State Income Taxes on Businesses

Corporations, partnerships, and certain trusts and derivatives are subject to income taxes in some states. To entice businesses, these states may offer lower corporate rates and exemptions. To be subject to income tax in a state, a corporation must have a substantial connection or nexus there. Nexus requirements vary by state but may include earning income, owning property, employing people, or having capital assets in the state. Income taxes must be apportioned, non-discriminatory, and adhere to constitutional standards.

Working and Living in Different States

The IRS has a way to figure out where you pay taxes based on where you work most of the time. But if you work in multiple states, it can be complicated. You may have to file taxes in each state where you worked. Some states have agreements to avoid double taxation, but if there’s no agreement, you may be able to claim some credits or deductions. It’s best to talk to a tax expert if you work in multiple states, because it can be tricky. Sometimes, states may even have legal fights over taxes like New Hampshire and Massachusetts did in 2020.