State income tax is a tax on wages, investment gains, and other income that your state government collects separately from federal income tax

When you earn money — whether from a job, self-employment, or investments — both the federal government and your state government want a share. Federal income tax goes to Washington. State income tax goes to your state capital. They are two separate systems with different rates, different rules about what counts as income, and different filing important date. Nine states have no state income tax at all. The other 41 states and Washington, D.C. each run their own system.

Your employer withholds both from your paycheck. If you are self-employed, you pay both yourself. The state portion appears as a separate line item on your pay stub, and you file a separate state tax return in addition to your federal return — usually to your state's department of revenue or equivalent agency.

Key Takeaways

  • State income tax is collected by your state government and is separate from federal income tax, with its own rates and rules that vary by state.
  • Nine states — Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming, and New Hampshire (on dividends and interest only) — do not tax wage income.
  • Your employer withholds state income tax from your paycheck, and you file a state return each year, usually by the same April important date as your federal return.
  • State income tax rates range from less than 1% to over 13%, depending on your income level and which state you live in.
  • Some states tax only wages, while others also tax capital gains, dividends, interest, and retirement income differently than the federal government does.

Why states collect income tax and what they spend it on

States use income tax revenue to fund schools, roads, police, courts, and other services that the federal government does not pay for. Unlike the federal government, most states cannot run a deficit — their constitutions require a balanced budget each year. This means they must either raise revenue through taxes or cut spending. Income tax is the largest single source of revenue for most states, accounting for roughly 30% to 40% of state tax collections.

The amount your state collects affects what services cost you indirectly. A state with high income tax but low property tax may be cheaper overall for renters and more expensive for homeowners. A state with no income tax but high sales tax hits low-income households harder, because they spend a larger share of their income on goods. There is no objectively "best" tax system — only different tradeoffs.

How state income tax rates work and why they differ from federal rates

State income tax rates are set by each state's legislature and vary widely. Some states use a flat rate — everyone pays the same percentage regardless of income. Colorado, Illinois, Indiana, Kentucky, Massachusetts, Michigan, Mississippi, Missouri, North Carolina, and Pennsylvania all use flat rates, which range from about 3% to 5.75%. Other states use a progressive system like the federal government, where the rate increases as your income rises. California's top rate exceeds 13%, while some states' top rates are under 6%.

Your state rate is completely separate from your federal rate. You might owe 22% federal tax and 5% state tax on the same dollar of income. The federal government does not care what your state charges, and your state does not care what the federal government charges. Some people mistakenly think paying state tax reduces their federal tax — it does not. You pay both in full.

A few states tax only certain types of income. New Hampshire taxes dividends and interest but not wages. Tennessee taxes dividends and interest but not wages. This means a retiree living on investment income in Tennessee pays state tax, while a wage earner does not. Other states tax all income the same way.

What income counts as taxable at the state level

Most states follow the federal definition of taxable income fairly closely, but not always. Wages, salaries, and self-employment income are taxable in all states that have income tax. Interest and dividends are taxable in most states, except the few mentioned above. Capital gains — profit from selling stocks, real estate, or other assets — are taxable in most states, though a handful tax them at a lower rate than ordinary income.

Some states exclude certain income that the federal government taxes. For example, many states do not tax Social Security benefits, even though the federal government does. Some states exclude military pay, pension income, or retirement account withdrawals. A few states exclude all retirement income. If you are retired or receive Social Security, your state tax bill may be much lower than your federal bill, or zero.

The state you live in on December 31 is the state that taxes your income for that year, regardless of where you earned it. If you moved mid-year, you may owe tax to two states. Some states have reciprocal agreements with neighboring states that let you work in one state and pay tax in another, but these are rare and explore only to specific situations.

How to file your state income tax return

You file your state return separately from your federal return, usually by April 15 of the following year — the same important date as federal tax. Some states allow extensions if you request one. You can file by mail, online through your state's website, or through tax software like TurboTax or H&R Block, which usually includes state return preparation.

Most states require you to file only if your income exceeds a threshold, which varies by state and filing status. Some states have no filing requirement if you have no tax owed. Check your state's department of revenue website to see whether you must file. If you are self-employed, you almost always must file, even if you owe no tax, because the state wants to see your business income and expenses.

If your employer withheld too much state tax during the year, you receive a refund. If your employer withheld too little, you owe the difference when you file. The amount withheld depends on the W-4 form you fill out with your employer — the same form that controls federal withholding. If you have multiple jobs or a spouse who works, you may need to adjust your withholding to avoid a large bill or refund.

States with no income tax and how they fund services instead

Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming, and New Hampshire (on wages only) do not tax income. These states fund schools and services through other means: sales tax, property tax, excise taxes on specific goods, or in Alaska's case, oil revenue. The tradeoff is usually that these states have higher sales tax or property tax than states with income tax.

If you move to a no-income-tax state, you stop owing state income tax when ready. If you move away from a no-income-tax state to one that has income tax, you begin owing it. Some people relocate specifically to avoid state income tax, though this only makes financial sense if you have substantial income and plan to stay for several years. Moving costs and the loss of other state benefits can outweigh the tax savings.

How state income tax interacts with federal tax and deductions

Your federal and state taxes are calculated independently. You cannot use your state tax bill to reduce your federal tax, and vice versa. However, some people can deduct state and local taxes (SALT) on their federal return, up to $10,000 per year. This deduction includes state income tax, state sales tax, and property tax combined. If you live in a high-tax state, you may hit this $10,000 cap and not be able to deduct all your state taxes federally.

Some states allow you to deduct federal income tax from your state taxable income, which lowers your state bill slightly. This is rare and applies to only a handful of states. Check your state's rules or ask a tax professional if you live in a state that might allow this.

If you have income from multiple states — for example, you worked in two states during the year — you may owe tax to both. Some states offer a credit for taxes paid to another state to prevent double taxation, but the rules vary. This situation is complex and often requires professional help to sort out correctly.

Frequently Asked Questions

Do I have to file a state return if I do not owe state tax?

It depends on your state and income level. Most states do not require a return if your income is below a certain threshold and you have no tax owed. However, if you are self-employed or had taxes withheld, you may need to file to get a refund. Check your state's department of revenue website for the specific filing requirement.

What happens if I move to a different state during the year?

You may owe tax to both states. You file a part-year return in the state you left and a part-year return in the state you moved to, each reporting only the income earned while you lived there. Some states offer credits to avoid double taxation. The rules vary significantly by state.

Can I deduct state income tax on my federal return?

You can deduct state and local taxes (SALT) on your federal return, but only up to $10,000 total per year. This $10,000 includes state income tax, state sales tax, and property tax combined. If you live in a high-tax state, you may not be able to deduct all your state income tax.

Why does my state tax capital gains differently than the federal government?

Some states tax capital gains at a lower rate than ordinary income, or tax them only if they exceed a certain amount. This is a policy choice by the state legislature to encourage investment or reduce taxes on certain types of income. The federal government makes its own separate choice about how to tax capital gains.

If I work in one state but live in another, which state taxes my income?

Generally, the state where you live taxes your income, even if you work elsewhere. However, some states tax income earned within their borders regardless of where you live. A few states have reciprocal agreements that let you work in one state and pay tax in your home state instead. Check both your home state and work state's rules, or ask your employer's payroll department.