State income tax is a tax on wages, investment earnings, and other income that your state government collects

Most states charge a percentage of your income as tax. The amount varies by state — some states have no income tax at all, while others take up to 13 percent. Your employer usually withholds state tax from your paycheck the same way they withhold federal tax, so you see less money in each deposit. At the end of the year, you file a state tax return to report your actual income and either get money back or pay what you still owe.

State income tax funds schools, roads, police, and other services in your state. Unlike federal tax, which goes to the national government, state tax stays in your state. The rate you pay depends on how much you earn — most states use a progressive tax system, meaning higher earners pay a higher percentage.

Key Takeaways

  • Nine states have no income tax at all: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming, and New Hampshire (which taxes only investment income).
  • Your employer withholds state tax from your paycheck based on a form you fill out when hired, similar to federal withholding.
  • State tax rates range from about 1 percent to 13 percent depending on your income level and which state you live in.
  • You file a state tax return once a year to report your total income and settle what you owe or claim a refund.

How state tax withholding works on your paycheck

When you start a job, you complete a state withholding form (sometimes called a W-4 or a state-specific equivalent). This tells your employer how much state tax to take out of each paycheck. The amount depends on your filing status, how many dependents you claim, and your expected income for the year.

Your employer sends the withheld money to your state's tax agency throughout the year. If your employer withholds too much, you get a refund when you file your return. If they withhold too little, you owe the difference. You can change your withholding at any time by submitting a new form to your payroll department — this is useful if you get a raise, lose a job, or have a major life change.

State income tax rates and brackets

Most states use a tax bracket system. This means different portions of your income are taxed at different rates. For example, a state might tax the first $20,000 at 3 percent, the next $30,000 at 5 percent, and anything above that at 7 percent. You do not pay the highest rate on all your income — only on the portion that falls into that bracket.

Tax rates vary widely. States like Colorado, Indiana, and Illinois have flat rates (everyone pays the same percentage regardless of income). States like California, New York, and Vermont have progressive systems with rates that climb as income rises. The nine states with no income tax are Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming, and New Hampshire (which taxes only investment and dividend income, not wages).

Filing your state tax return

You file a state tax return once per year, usually by April 15 (the same deadline as federal tax). You report all income you earned in that state during the previous year — wages, self-employment income, rental income, and investment earnings. You also claim deductions and credits that lower your taxable income.

Most states let you file online through their tax agency website or through tax software like TurboTax or H&R Block. Some states offer free filing if your income is below a certain threshold. If you moved during the year or worked in multiple states, you may need to file returns in more than one state. Your state tax agency website has forms and instructions specific to your state.

What happens if you move to a different state

If you move mid-year, you typically file a part-year return in both your old state and your new state. Each state taxes only the income you earned while living there. For example, if you earned $30,000 in State A and $20,000 in State B, State A taxes the $30,000 and State B taxes the $20,000.

Some states have reciprocal agreements with neighboring states, meaning residents of one state who work in another may not owe tax to the state where they work. A few states also offer credits to prevent you from paying tax twice on the same income. Check your state's tax agency website or ask your employer's payroll department if you work across state lines.

Self-employment and state tax

If you are self-employed, you still owe state income tax on your business earnings. You do not have an employer to withhold tax for you, so you may need to make estimated tax payments to your state four times per year (usually in April, June, September, and January). These payments cover both federal and state tax.

When you file your state return, you report your business income and expenses, calculate your net profit, and then settle what you owe or claim a refund based on the estimated payments you made. If you expect to owe more than a certain amount (usually $500 to $1,000 depending on the state), you are required to make estimated payments or face a penalty.

State tax deductions and credits

States offer deductions and credits that reduce the tax you owe. Common deductions include the standard deduction (a set amount everyone can subtract), mortgage interest, property taxes, and charitable donations. Credits are even better — they reduce your tax dollar-for-dollar rather than just reducing your taxable income.

Many states offer credits for things like dependent children, education expenses, earned income (if you have low income), and property taxes paid. Some states also credit you for taxes paid to other states if you worked in multiple places. Your state tax agency website lists all available deductions and credits, and tax software usually walks you through them during the filing process.

Frequently Asked Questions

Do I have to file a state tax return if I did not earn much money?

It depends on your state and income level. Most states have a minimum income threshold — if you earned less than that amount, you do not have to file. However, filing anyway can be worth it if you had taxes withheld, because you may get a refund. Check your state's tax agency website for the specific threshold.

What if I worked in one state but live in another?

You typically owe tax to the state where you worked, not where you live. However, some states have reciprocal agreements that change this rule. If you live in State A and work in State B, check whether they have a reciprocal agreement. Your employer's payroll department can usually tell you which state they withhold for.

Can I get a state tax refund?

Yes. If your employer withheld more state tax than you actually owe, you get the difference back as a refund. This happens when you claim too many exemptions on your withholding form or when your income drops during the year. You receive the refund a few weeks after you file your return.

What if I did not file a state tax return in past years?

Contact your state's tax agency as soon as possible. Most states allow you to file back returns without major penalties if you owed a refund. If you owed tax, penalties and interest will apply, but filing is still better than not filing. Your state tax agency can help you determine what you owe.

Are retirement benefits taxed by the state?

It depends on the type of benefit and your state. Social Security is not taxed by most states. Pensions, 401(k) withdrawals, and IRA distributions are usually taxed as income. Some states exempt military pensions or teacher pensions. Check your state's tax agency website or ask the organization paying your benefit whether it is subject to state tax.