Why do I owe state taxes? Understanding your tax obligations

Summary

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% and go up to 37%, 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: 

State tax rates vary hugely across the country, from 0% in nine states to more than 13% 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, both of which can be completed online.

Federal and state income taxes also differ in the rates they impose. 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.

Can I owe state taxes but not 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.

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

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.

Broadly speaking, calculating both of these numbers can give you an idea of how much state tax you owe. However, tax calculations can be tricky, so it’s best to work with an expert if you have any queries or concerns about paying the right amount of tax.  

It’s also important to remember paying your state taxes late can result in fines and penalties from your state tax agency, which will lead to higher costs.

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.

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?

Many states use other state taxes to raise revenue.

These can include:

It’s important to be aware of all the state-level taxes you have to pay and budget accordingly, as these can quickly add up and eat into your income.

However, 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.

How much capital gains tax do I pay?

Capital gains tax (CGT) is incurred on the profit an individual makes when you sell an asset or investment.

CGT is taxed in one of two ways:

Short-term capital gains is taxed as ordinary income, while long-term capital gains has its own tax rates – 0%, 15%, and 20% depending on your filing status and the value of your profit.

The majority of US states also have their own capital gains tax rates, with most states taxing capital gains as income.

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. 

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

Get expert financial advice

State and federal taxes apply very differently, meaning you can end up owing money for your state taxes. However, substantial savings can also 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 2-minute survey, and Unbiased will find you’re an SEC-regulated financial advisor perfectly suited to meet your needs.