What Is Involved in Paying State Taxes?

Most states levy a personal income tax on residents to fund public services like education, infrastructure, and law enforcement. Each state establishes its own rules, tax rates, and filing requirements. Some states have a progressive tax system where rates increase with income, while others apply a flat tax rate. A handful of states do not impose any personal income tax, so your obligations depend on where you live and earn income.

Determining Your State Tax Obligation

Your requirement to file a state tax return is based on your residency status, which states determine using two main tests: domicile and statutory residency. Your status dictates whether a state can tax all your income or only the income earned within its borders.

Your tax situation is more complex if you move during the year or work in a different state than where you live, which may require filing in multiple states. To prevent double taxation, states offer credits for taxes paid to another state, and some have reciprocal agreements.

Residency Status

Your domicile is the state you consider your permanent home and where you intend to return after being away. An individual can only have one domicile. Proving domicile includes factors like voter registration, your driver’s license, and the location of your family and possessions.

You can be considered a “statutory resident” of a second state even if your domicile is elsewhere. This status is triggered by spending a significant amount of time there, defined by the “183-day rule.” If you spend more than 183 days in a state and maintain a permanent place of abode there, that state can tax your income as a full resident.

Non-Residents and Part-Year Residents

If you earn income in a state where you are not a resident, you must file a non-resident tax return. This applies to working in one state while living in another or earning rental income from property in another state. A non-resident return reports only the income earned from sources within that state, which then taxes that portion of your income.

If you move from one state to another during the tax year, you become a part-year resident in both. This requires filing a part-year resident return in both your old and new states, reporting the income earned while you were a resident of each.

Multi-State Filing Scenarios

Living in one state and working in another creates an obligation to file two tax returns: a resident return for your home state and a non-resident return for your work state. Your home state can tax all of your income, regardless of where it was earned. Your work state can tax the income you earned within its borders, which can lead to double taxation.

To prevent this, your resident state provides a “credit for taxes paid to another state.” You first file a non-resident return for your work state, paying tax on wages earned there. When filing your resident return, you report all income but can claim a credit for the taxes paid to the work state.

Reciprocal Agreements

To simplify filing for commuters, some neighboring states have reciprocal agreements. These allow a resident of one state who works in another to pay income tax only to their state of residence. If an agreement exists between your home and work states, you can file an exemption certificate with your employer.

This eliminates the need to file a non-resident return in the work state. These agreements only apply to wage and salary income; other income types earned in the non-resident state may still require a non-resident filing.

Information and Forms for Filing

Before preparing your state tax return, you must gather all necessary personal and financial information. This includes identification numbers for yourself, your spouse, and any dependents, plus details about your income and any deductions or credits. Most state tax calculations begin with a figure from your federal tax return, making a completed federal return a prerequisite.

Required Personal and Financial Information

You will need the Social Security numbers (SSNs) for everyone on the return. Have your bank account and routing numbers ready for direct deposit of a refund or to pay taxes owed.

A copy of your completed federal income tax return (Form 1040) is also required. Most states use the federal Adjusted Gross Income (AGI) as the starting point for their tax calculations, so having your federal return is necessary to transfer relevant figures.

Essential Tax Documents

Your financial information comes from tax documents received throughout the year. Form W-2, from each employer, details your annual wages and taxes withheld. If you are self-employed or have other income, you will need your 1099 forms.

Common 1099 forms include:

• Form 1099-NEC for nonemployee compensation
• Form 1099-INT for interest income
• Form 1099-DIV for dividends
• Form 1099-R for distributions from retirement plans

Gathering all W-2s and 1099s ensures all your income is reported accurately.

State-Specific Adjustments

States have their own rules for taxable income and may require you to make adjustments to your federal AGI. You will need to gather records for these state-specific items. For example, some states offer a deduction for contributions to their 529 college savings plans.

Another common adjustment is for income from U.S. Treasury securities. This interest is taxable at the federal level but is exempt from state taxation, so you will need records of this income to subtract it on your state return.

Obtaining and Understanding State Tax Forms

The official forms for filing are available from your state’s tax agency, usually called the Department of Revenue. Their websites are the source for downloading the current year’s tax forms, instruction booklets, and schedules. These booklets provide line-by-line guidance on completing the forms.

Before you begin, review the instructions to understand the requirements for your filing status and income. The booklets contain tax tables or worksheets to determine your final tax liability.

Methods for Filing and Paying Your State Taxes

After completing your state tax forms, you must submit your return and make any required payment. The two ways to file are electronically or by mail. To pay a tax balance, you can authorize an electronic payment from your bank account, use an online portal, or mail a check or money order. Understanding each option ensures your payment is submitted correctly and on time.

Filing Methods

Electronic filing (e-filing) is the most common method for submitting state tax returns. You can e-file through tax preparation software or, if you meet income requirements, through free-file portals on many state revenue department websites. The process involves reviewing your return for accuracy and authorizing its submission.

Alternatively, you can file a paper return by mail. This requires printing your completed forms and mailing them to the address in the instructions. You must sign and date the return and attach required documents, like copies of your W-2s.

Payment Methods

If you owe taxes, you can pay via electronic funds withdrawal when you e-file. By providing your bank account and routing number, you authorize the state to debit the amount owed, and you can schedule this payment for any date up to the tax deadline. Another option is your state’s online payment portal, which allows payment from a bank account or by credit or debit card. Paying by card involves a processing fee charged by a third-party vendor.

You can also pay by mailing a check or money order. Make it payable to the entity named in the tax instructions. To ensure proper credit, write your Social Security number, the tax year, and the form number on the memo line. If filing a paper return, mail the check with it; if you e-filed, mail the check separately with a payment voucher.

Handling Filing Extensions and Payment Plans

Circumstances may prevent you from filing or paying on time. State tax agencies have procedures for these situations. If you need more time to complete your return, you can request a filing extension. If you cannot afford to pay the full amount, you may be able to set up a payment plan.

An extension provides more time to file, not more time to pay. A payment plan allows you to pay your tax liability over time but does not eliminate penalties and interest for late payment.

Filing an Extension

If you cannot complete your state tax return by the mid-April due date, you can get an automatic six-month extension to file. In many states, filing for a federal extension with the IRS automatically grants a state extension, but some states require you to file a separate extension request form.

To avoid late-payment penalties and interest, you must estimate your tax liability and pay what you expect to owe by the original filing deadline. If you do not pay a significant portion, often 90%, of your actual tax liability by the deadline, the extension may be voided.

Setting Up a Payment Plan

If you can file on time but cannot pay the full amount, you can request a payment plan, also called an installment agreement. This allows you to make monthly payments over a set period. The process involves completing an application from the state’s department of revenue website.

The application requires details about your financial situation, the amount owed, and your proposed monthly payment. If approved, the state will notify you of the terms. While a payment plan prevents severe collection actions, interest and late-payment penalties will continue to accrue on the outstanding balance until it is paid in full.