Since much legislation throughout the United States is fairly uniform, people may assume that laws concerning income taxes are as well. However, every state is not the same when it comes to taxation, especially in the case of income taxes. Some states do not levy any income taxes, at least not any state-level taxes in addition to federal income taxes. Others simply have a different method for defining “income.”
For example, Tennessee and New Hampshire only charge income taxes on dividends and interest. Moving to one of these states may be appealing to those who want to pay less in income taxes and would like to keep more of their hard-earned money. They’ll only have to pay federal taxes on wages or other earnings.
Forty-one of the fifty states do collect income taxes on wages and other monies deemed to be income. Of the forty-one, thirty-five of them base the rate of income taxes on a percentage of what you owe in federal taxes or using a person’s gross income to determine the amount owed to the state. Some use taxable income, the amount left after allowed deductions and expenses, to determine the amount of state income taxes.
The states that do not collect income taxes are as follows: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. This fact may make these seven states particularly attractive to people who are considering relocating or retiring. Having to pay taxes on Social Security may seem like an insult to some, which would be further compounded by also having to pay state income taxes on your own money.
Another important issue to consider is whether you choose to take standardized deductions or to itemize different exemptions when it comes to income taxes. You may need the assistance of a professional in order to file appropriate state returns, which can differ vastly from federal returns. Tax codes can be confusing, although there are online services and software available to help you sort through your income taxes, if you’d like to give it a try before consulting a professional.
On the other hand, you may just want to file electronically in order to get the process going more quickly, especially if you are expecting a refund. Again, state laws will vary, so if you file electronically, check to see if you also need to send a hard copy via regular mail when you file your state income taxes.