Why Do I Have to Pay to File State Taxes?

Filing federal taxes is often free, but many taxpayers are surprised to find that state tax filing frequently comes with a cost. Some states provide free filing options, while others require payment due to financial and administrative factors. These expenses stem from state revenue structures, mandatory processing fees, or third-party services.

Filing Thresholds

Each state sets its own rules for when individuals must file a tax return, and these thresholds vary widely. Some states require residents to file even with minimal income, while others align with federal standards. For instance, in California, single filers under 65 must file a state return if their gross income exceeds $21,455 in 2024. In New York, the threshold is $8,500 in taxable income.

For those living in one state but working in another, filing obligations can be more complicated. Some states have reciprocity agreements that exempt residents from filing in the state where they work. A New Jersey resident working in Pennsylvania, for example, only files in New Jersey due to such an agreement. However, someone living in Texas but earning income in California would likely need to file a California nonresident return, even though Texas has no state income tax.

Different Revenue Structures

States rely on various revenue sources, influencing tax filing costs. While the federal government primarily collects income tax, states use a mix of income, sales, property, and excise taxes. Some, like Florida and Washington, do not levy personal income tax and instead depend on sales and business taxes. Others, such as California and New York, impose progressive income tax rates.

States with complex tax structures require more administrative resources. Those with multiple tax brackets, local income taxes, or numerous deductions and credits need additional oversight. Minnesota has four income tax brackets ranging from 5.35% to 9.85%, while Illinois applies a flat 4.95% rate. To manage these complexities, some states partner with private software providers, leading to additional costs for taxpayers.

States that rely heavily on sales taxes, such as Tennessee, which has a combined state and local sales tax rate of 9.55%, have minimal income tax filing requirements. However, states dependent on income taxes must ensure compliance through detailed tax collection systems, which can result in higher administrative fees. Oregon, for example, verifies deductions, personal exemption credits, and refundable credits, adding to processing costs.

Mandatory Processing Fees

State tax agencies incur costs to handle tax returns, and some states pass these expenses to taxpayers through mandatory processing fees. These fees cover data entry, fraud detection, and electronic payment processing. While federal returns are processed by the IRS at no cost to most filers, state tax agencies operate independently and often lack comparable funding.

Electronic filing, though more efficient than paper returns, still involves costs related to secure online platforms, identity verification, and banking integration for refunds or tax payments. Some states offset these expenses by charging a small fee for electronic submissions. Indiana’s Department of Revenue, for example, charges a convenience fee for credit card payments.

Some states contract third-party vendors for return processing, resulting in additional fees. States without their own tax filing systems often rely on commercial providers that charge service fees. While some filers qualify for free state-sponsored programs, others must pay to use these platforms.

Local or Municipal Requisitions

Some states allow cities, counties, and other local jurisdictions to impose their own income taxes, adding complexity to the filing process. These local taxes often require separate calculations, forms, and payments, increasing filing costs. In states like Ohio and Pennsylvania, where hundreds of municipalities levy local income taxes, taxpayers may need to file both a state and a local return, sometimes using different systems.

The rates and rules for local income taxes vary widely. In New York City, residents pay an additional local income tax ranging from 3.078% to 3.876%, depending on earnings. In Kentucky, local occupational taxes are based on wages and differ between counties. These variations often require specialized tax preparation tools, which may not be covered under free filing options, forcing taxpayers to pay for additional software or professional assistance.

Handling Multiple State Returns

Taxpayers earning income in multiple states often face additional filing requirements, leading to higher costs. Unlike federal taxes, which apply uniformly, state tax laws vary, and individuals may need to file multiple returns if they live in one state but work in another or earn out-of-state income. Determining which state has the right to tax specific earnings and whether credits are available to avoid double taxation can be complex.

Many states offer a credit for taxes paid to another state, preventing residents from being taxed twice on the same income. A Virginia resident working in Maryland, for example, can claim a credit on their Virginia return for taxes paid to Maryland. However, calculating these credits and ensuring compliance with each state’s tax laws often requires specialized tax software or professional assistance. Some states have unique sourcing rules for income, such as California’s approach to taxing nonresidents on in-state earnings, complicating filings further.

Potential Third-Party Costs

Many taxpayers rely on third-party services to file their state returns, often incurring additional fees. While the IRS offers Free File for eligible taxpayers, state returns are not always included, requiring individuals to pay separately. Tax preparation software providers, such as TurboTax and H&R Block, frequently charge extra for state returns, even if the federal return is free. These fees vary depending on the complexity of the return, with more intricate filings—such as those involving multiple state returns or itemized deductions—often costing more.

Professional tax preparers also charge for state filings, with costs depending on the complexity of the return and the preparer’s expertise. A certified public accountant (CPA) or enrolled agent may charge anywhere from $50 to several hundred dollars for a state return, particularly if multiple states are involved. Some states offer free filing options through official tax agency websites, but these are often limited to certain income levels or filing statuses. Taxpayers who do not qualify for these programs may have no choice but to pay for third-party assistance, adding to overall tax compliance costs.