Four Things You Need to Know About Filing State Tax Returns

When tax season kicks off, most people think primarily about the IRS and filing their federal tax return. However, for a majority of Americans, filing at least one state tax return is also imperative. States enact their own set of tax laws and, depending on how complicated your filing situation is, they can produce wildly different results from what you report to the IRS. Here are four things you should be aware of when it comes to state-level tax matters.

1. Seven states don’t have an income tax at all.
Of the 50 states, 41 plus the District of Columbia levy a broad income tax. If you live in Alaska, Florida, Nevada, South Dakota, Texas, Washington or Wyoming, you don’t have to pay state income tax and, subsequently, do not have to file a state tax return. People often put Tennessee and New Hampshire on this list as well, but these states’ only tax investment income includes interest from savings and dividends from owning stocks.

2. You may be required to file a state tax return for multiple states if you live across state lines or work remotely.
If your home resides close a state border and you happen to work in a state other than the one that you live in, you may have to file multiple state tax returns. Even if you don’t owe taxes to the state where you work, you may still need to report your income to that state. While you may not be taxed twice at the state level, a return for each state will need to prepared to help determine if any tax is due. This is true for employees who physically work in a boarding state as well as those that work remotely for an employer located in another state.

Occasionally, this situation will result in an unexpected tax bill or refund, if withholding is not appropriate for the state in which you live. You may consider contacting your state tax department to learn about any reciprocity agreements that affect people working across state lines.

3. If you moved between states, you may need to file a partial-year resident state tax return for your old state as well as one for the new state. If the state that you moved from is one of the 43 that has an income tax, remember to find out whether you need to file a tax return as a part-year resident for the months you were still living or working there. Each state has its own rules about what merits being a part-year resident; be sure to check with that state’s tax department when in doubt.

4. If you owe state taxes, check the state’s rules regarding payment plans and other options, as each will be different.
If you owe taxes at the state level and are unable to pay, please be advised that each state has its own collection procedures and options for payment plans, or lack thereof. While IRS agents are unable to show up at your door unannounced over unpaid taxes (thanks to the Internal Revenue Service Restructuring and Reform Act of 1998), your state tax department may actually be permitted to do this to some extent.

A state tax department may have different due process for collections. In some cases, they may have less flexible payment plans than what the IRS offers. As such, if you are unable to pay both your federal and state bills on time, and wish to schedule a payment plan with one or the other, it is wise to check with your state regarding payment options prior to paying your federal bill.

Note: States & U.S. territories may make changes to their tax laws with little notice. We do our best to keep this information up-to-date, but it is provided on an "AS IS" basis. For more see our terms.