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State Income Taxes Explained
In addition to federal income taxes, residents in some states must also pay state income taxes. The only states in which there are no state taxes are Alaska, Florida, South Dakota, Nevada, Wyoming, Texas and Washington. In Tennessee and New Hampshire there are only state taxes for income that comes from interest and dividends.
That leaves a total of 41 states that do have state taxes. 35 of those 41 states base the state taxes on the federal returns. In most circumstances in those states a part of what the taxpayer pays the IRS goes to the state. In other situations the state uses the federal adjusted gross income of the tax payer as the starting point for determining state taxes.
In determining how state taxes are calculated it is also important to understand how different states handle matters such as personal exemptions and standard deductions. In most states, there are amounts that are specified for the taxpayers as well as for their dependents which can be used to offset the taxable income. There are only two states that allow taxpayers to fake full deductions for medical and dental expenses. Those states are Oregon and North Dakota. Indiana does not allow any itemized deductions on state taxes at all. Of the 41 states that impose state income taxes only 12 states allow taxpayers to deduct their federal income taxes.
If you are a senior citizen, it is also important to understand how retirement income may be treated under state taxes. Most of the states will begin calculating state personal income tax liability with the federal AGI. This is important because a portion of Social Security benefits may be required to be included in a taxpayer's AGI. If a portion of the Social Security benefits are included in the federal AGI and the taxpayer lives in one of those states then that same portion would also be subject to state taxes as well.
There are some states that exclude Social Security benefits from state taxes completely. There are 26 states as well as the District of Columbia that provide these exclusions. Those states are Arizona, Alabama, Arkansas, Delaware, California, Hawaii, Georgia, Illinois, Idaho, Indiana, Louisiana, Kentucky, Massachusetts, Maryland, Mississippi, Michigan, New York, New Jersey, Oklahoma, Ohio, North Carolina, South Carolina, Pennsylvania, Oregon, Virginia and Wisconsin.
State taxes are typically figured on a six bracket progressive scale that is similar to the federal tax table.
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