About State Income Tax
Millions of Americans dread the arrival of April 15 each year, which is the last day in which residents from California to Maine can file their federal income tax returns. Since 39 states require residents to pay income taxes each year, this date is doubly painful financially for struggling families and businesses. The relationships between local, state and federal income taxes can be difficult to navigate for the best tax experts. A better understanding of state income tax basics is necessary to avoid legal and financial troubles in the future.
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Legal Grounding for State Income Taxes
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The 10th amendment to the U.S. Constitution grants state governments all powers not enumerated to the federal government within the document. States have traditionally followed the Constitution's definition of taxation in Article 1, Section 8, which lays out conditions for fair taxation in the United States. Since the Constitution was ratified in 1789, states have used excise taxes, duties and traditional income taxes to fund their programs. After the 16th amendment granted the federal government power to levy an income tax, states adjusted accordingly to prevent excessive taxation on their residents.
Effects of Local and Federal Income Taxes
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State income taxes are dependent in some sense on income rates charged at the county and the federal level. Residents of 14 states are subject to income taxes at the municipal and county level in addition to state and federal taxes. Six states using local, state and federal income taxes coordinate their rates and deductions to make filing easier. The major issue awaiting taxpayers in the remaining eight states is gathering appropriate documents to cover the gauntlet of itemized deductions at all three tax levels.
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Standard Deductions
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The standard deduction is the dollar amount that is taken off taxable income before calculating taxes owed to the state. Iowa has the lowest deduction at $1,780, and Oregon sets its at $1,865. Wisconsin represents the highest deduction with $8,960 available to single filers. A notable figure in state income taxes is $5,450, the deduction figure for 11 of the 31 states that utilize a standard deduction.
Marginal Tax Rates
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The marginal tax rate is a good determinant of the leniency or strictness of a state's income tax laws. Rhode Island charges a 9.9 percent marginal tax rate on all incomes over $357,570, while Missouri charges 6 percent on all incomes over $9,000. While Rhode Island's maximum rate may seem high, the state of Missouri is hitting everyone above $9,000 in taxable income with the same rate. At the lower end of the marginal tax rate spectrum, Iowa charges a mere 0.30 percent for incomes up to $1,407 while Minnesota charges 5.35 percent on taxable income up to $22,730.
Income Tax-Free States
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Real estate investors, athletes and actors flock to states like Florida and Nevada for more than the warm weather. These states do not have income taxes, using sales taxes and corporate taxes to refill their coffers each year. Seven states do not levy an income tax, including Alabama, South Dakota, Texas, Washington and Wyoming. Residents still have to pay federal income taxes, but the amount of paperwork needed ahead of April 15th is less substantial than in other states.
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- Photo Credit Photo by Thomas Hawk (Flickr)
