Details on State Personal Income Tax Laws
All Americans earning an income are required to file a federal personal income tax return. Those earning the highest income pay the largest percentage of that income in taxes, at least in theory. In reality, high earners often pay less in taxes (as a percentage) by hiring tax attorneys who are able to find deductions and exploit loopholes. Some types of income are not taxable, including child support payments and welfare benefits. Most states also collect a tax on personal income, which usually is filed in mid-April along with your federal tax return.
This article provides an overview of state income tax laws, rates, and procedures. See Personal Income Tax: Overview for the basics of federal income taxes. FindLaw also provides links to state tax codes, tax forms, and taxpayer assistance programs.
State Personal Income Taxes at a Glance
Most states have a personal income tax, which raises revenue for important social programs and shared resources, such as public education and highway infrastructure. Tax rates vary quite a bit from state to state. For sake of comparison, California's highest marginal tax rate for 2014 was 13.3 percent, while Pennsylvania's 3.07 percent flat tax was among the lowest for that tax year.
A majority of states that do collect income tax do so with a sliding scale based on income, often referred to as a progressive tax policy. For instance, people earning less than $10,000 of taxable income may pay only 3 percent of that in taxes, with the highest earners paying as much as 7 or 8 percent. As noted above, the actual amount of taxes paid usually depends on the complexity and sophistication of the prepared tax return.
It's worth stressing that the tax rates can be misleading at times, since the effective ("actual") rate may depend on exemptions and deductions made available in your state's tax code.
States with No (or Limited) Personal Income Tax
A total of seven states do not collect income tax (as of April 2015): Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. Alaska is the only state that collects neither income nor retail sales tax, since the state raises revenue through the sale of its oil resources. But most states without an income tax make up for their revenue needs through sales and business taxes, liquor sales, licensing fees, and other sources.
Tennessee and New Hampshire are unique. Tennessee limits taxes to income from interest on bonds and dividends from stocks, at a rate of 6 percent. New Hampshire's tax code is similar, taxing income from dividends and interest at a rate of 5 percent. Both state's tax codes apply to individuals and entities such as partnerships and limited liability companies.
State Personal Income Taxes: Examples
Tax laws and rates tend to change quite frequently, often as part of an incremental increase or decrease in taxes over the course of several years. Tax codes also may change when there is a shift in the state's political influence. Always check with your state's official tax department for specifics.
Here are some examples of state tax codes:
- Colorado: 4.63 percent of federal taxable income; general rate for all taxpayers ("flat" tax)
- Illinois: 5 percent of taxable net income imposed on all taxpayers ("flat" tax); an additional personal property replacement tax of 2.5 percent of net income is imposed on partnerships, trusts, and S corporations
- Kansas: $405 plus 4.8 percent of any income over $15,000 (for 2014 tax year)
- New York: 4 percent on first $16,000, up to 6.85 percent on all income over $300,000
- Massachusetts: 5.3 percent for interest and dividends; 12 percent for short-term capital gains; and 5.85 percent for all other taxable income
Get Legal Help to Better Understand Your State's Personal Income Tax Laws
Taxes can be complicated, and errors in tax payments can result in a hassle at best and criminal charges at worst. If you have questions about your state's personal income tax laws, or would like to know what taxes apply to your specific situation, it's best to speak with a skilled tax lawyer near you.
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