Why do I owe state taxes?

1 min readLast updated October 31, 2023by Rachel Carey

This article explains the difference between federal and state taxes, how much you owe, and how you could save money on state taxes.

What is the difference between state and federal taxes? 

Every US citizen has to pay federal income tax.  

However, in addition to income tax rates at the federal level, which begin at 10 percent and go up to 37 percent, most states also impose their own income taxes.  

In fact, only nine states in the US choose not to collect state income taxes. These are: 

  • Alaska 

  • Florida 

  • Nevada 

  • New Hampshire 

  • South Dakota 

  • Tennessee 

  • Texas 

  • Washington 

  • Wyoming 

State tax rates vary hugely across the country, from 0 percent in nine states to more than 13 percent in some states. 

Unlike federal income tax, which is paid to the IRS, your state income taxes are paid to the state and go towards local services. To pay your state income tax, you’ll have to file a state tax return alongside your federal tax return, which can be done online. 

There are other differences between federal and state income taxes. For example, state income tax brackets differ from federal income tax brackets. This means that while you might pay both state and federal income taxes, you will likely not be paying the same amount for each.  

Why do I owe state taxes but not federal? 

If you don’t pay the correct amount of state tax, you can receive a state tax bill informing you that you owe your state taxes. Don’t panic that this means there could be a mistake on your federal tax return – sometimes, you can owe state taxes without owing any federal taxes. 

You can owe state taxes while being up to date with your federal tax bill because the state tax brackets are different. Therefore, if your income changes, it may not impact the federal taxes you pay but may change the amount you owe at the state level. 

Changes to your income can also impact your state income tax credits and, therefore, change what you owe. 

Many state income taxes will take into account considerations such as your spouse and household, so changes in circumstances, such as getting married or divorced, could also change your state tax bracket. 

Some other situations that may lead to a change in your state taxes include: 

  • Changing jobs 

  • Picking up an additional job 

  • Being self-employed and underpaying estimated tax 

  • Changes to your married state (if you become married, divorced or widowed) 

  • Having a child 

  • Lottery winnings 

  • Buying or selling a home 

Many different factors can impact the amount of taxes you owe. A financial advisor can help you ensure you’re paying the correct amount of state tax and taking advantage of any savings you might be entitled to. Find a financial advisor today.  

How much do I owe in state taxes? 

To determine how much you owe in state taxes, you should check the guidance from your state tax authority. You can use this guidance to determine how much you owe based on your income bracket.  

In addition to considering your income, many states offer tax credits and subsidies, which can lower your tax burden. 

Paying your state taxes late can result in fines and penalties from your state tax agency, so ensure you’re on top of your state tax bill. 

Why do I have to pay state taxes? 

The federal income taxes you pay go toward nationwide spending on things like Social Security, military spending and national highways. However, your state needs revenue to pay for things like education and the local police force, as well as local government services not paid for by the federal government. 

In the cases of the nine states that choose not to collect a state income tax, they raise this revenue in other ways, such as property and sales taxes. 

What other types of taxes do I pay? 

The main state tax to be aware of is your state income tax, which – if you live in any of the 41 states that impose their own income tax – you’ll have to pay alongside your federal income tax

In addition, many states use other state taxes to raise revenue. These can include a state sales tax on certain goods and services, such as alcohol or tobacco, as well as motor tax, estate tax, property tax and, in some cases, retirement tax. 

How can I reduce my state income tax liability? 

There are many ways to ensure you are filing your state taxes efficiently. 

Planning ahead for the state tax filing deadline can help you to avoid paying the wrong amount. If you are employed, check with your employer about your tax withholding. If you withhold too little or too much, you can adjust your withholding amount by filling out a new W-4 form.  

As we’ve mentioned, there are some state tax credits available. There can also be ways to organize your finances in a tax-efficient way. Your state tax agency may be able to provide you with guidance about available tax credits. 

If you’ve changed your circumstances, including getting married, buying a house or having a child, remember these may change how much you owe. 

The bottom line 

So, there’s an overview of the difference between state and federal taxes. The two types of income tax apply very differently, meaning you can end up owing money for your state taxes. However, there can also be substantial savings to be made via state tax credits. 

To ensure you are paying the correct amount of tax, Unbiased can match you with a financial advisor who can review your finances and help you manage your taxes. Start by taking our 5-minute survey, and Unbiased will find you’re an SEC-regulated financial advisor perfectly suited to meet your needs.

Senior Content Writer

Rachel Carey

Rachel is a Senior Content Writer at Unbiased. She has nearly a decade of experience writing and producing content across a range of different sectors.