While paying taxes may not be your preferred financial job, it is necessary to have a positive relationship with the IRS. If you filed a return and received a tax bill rather than a refund, you may wonder why you owe state taxes. This year, you may be required to pay state income taxes for a variety of reasons. Understanding your state tax debt may help you avoid it next year.
What Is the Difference Between State and Federal Taxes?
Income tax and other kinds of taxes are levied by both the state and federal governments. They are not, however, identical.
To begin, federal taxes apply to everyone, regardless of where they live. While there are certain exceptions, the IRS requires the vast majority of taxpayers to file a tax return. The information you provide on your federal income tax return is used to determine your tax due. So, what determines whether you owe federal taxes or get a refund? You may be entitled to a refund if you paid too much in taxes through payroll withholding during the year. You may owe more tax if you withheld inadequate tax.
If you live in a state that taxes your wages, you must submit both federal and state returns. This form calculates your state income tax due based on your earnings and any tax deductions or credits you claim. Because state tax brackets may differ from federal tax brackets, you may owe state taxes but not federal.
Again, whether you owe state taxes or get a refund depends on how much tax you paid throughout the year.
What Are State Income Taxes?
State income taxes are a percentage of your profits that you pay to the state government. State governments, like the federal government, tax your profits extra if you have a good relationship with them. While each state has the power to charge the tax, most jurisdictions follow a similar framework to the federal government. A handful of States, however, impose or do not impose a flat-rate income tax on all taxpayers.
Taxation at a Flat Rate
Only 10 states have a flat tax. Colorado, Illinois, Indiana, Kentucky, Massachusetts, Michigan, New Hampshire, North Carolina, Pennsylvania, and Utah are among them. All taxpayers pay the same rate on a flat tax, also known as a fair tax. In 2020, Pennsylvania’s flat state income tax rate was 3.07 percent, while North Carolina’s was 5.25 percent. So, if you earn $100,000 in Pennsylvania, your state income tax is only $3,070. Millionaires pay 3.07 percent or $30,700.
States That Do Not Have an Income Tax
There are also seven states that do not levy an income tax. Among them are Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. These states have no income tax, although they do have sales, fuel, and cigarette taxes as well as property taxes. According to the Tax Foundation, inhabitants of states without an income tax pay a less total tax per capita.
Taxation on a Sliding Scale
The remaining 36 states have the same tax system as the federal government and the District of Columbia. This involves taxing your income in different categories at varying rates that grow in line with your annual income. State income tax laws are typically simpler than federal tax laws, with fewer tax bands and lower rates. Some states even have tax rules in place that adjust tax categories and rates automatically to account for inflation.
Taking State Income Taxes into Account
If you pay state income tax, you can deduct it from your federal return. You can deduct state income tax only if you itemize deductions on your federal tax return.
Calculate your yearly deductible costs, including state income tax. Then, compare them to the standard deduction amount for your filing status. A single taxpayer, for example, can claim a standard deduction of $12,400 in 2020. Since state income tax and other itemized deductions total above $12,400, you should consider itemizing. If not, you’re probably better off taking the standard deduction.
Beginning in 2018, state and local tax deductions, including state income taxes, are restricted to $10,000 per year. Prior to 2018, the deduction is unlimited. However, claiming a large amount of state and local taxes may trigger the Alternative Minimum Tax.
Why Do I Have to Pay State Taxes?
It’s not uncommon to owe money rather than receive a refund while filing state taxes.
It is important to understand that state and federal tax regulations and tax brackets are not the same. If your income has grown significantly in recent years, you may be subject to a higher state tax rate. This might result in a larger tax burden.
Consider what you withdrew from your pay throughout the course of the year. Again, not withholding enough taxes may result in owing money to state tax authorities when the time comes to file. In order to prevent future state tax payments, you may need to alter your withholding. Using an online paycheck calculator will help you determine how much withholding you should make.
Income variations may affect your eligibility for some tax advantages. Assume you previously qualified for the federal Earned Income Credit but were denied it owing to a rise in income. If you no longer qualify for the federal credit, you may lose access to similar state tax advantages.
Your deductions and whether you itemize or take the standard deduction may affect your state tax bill. For example, if you have fewer deductions than in previous years, you may have fewer items to classify. You can also pick the standard deduction. In any event, this may have an impact on your state tax liability, perhaps increasing your debt.
Additional circumstances that may influence your state tax filing include the following:
- Getting a second job or switching careers
- If you work for yourself, you may be underpaying your quarterly taxes.
- Divorce or marriage
- Becoming a widow (er)
- Adoption of a kid
- Loss of the capacity to claim a kid as a dependant
- Reporting of Gambling Winnings
- Obtaining Social Security payments for the first time
- Taking money out of a 401(k) or individual retirement account
- Buying or selling a house
- Capital gains from investment sales must be recorded.
- Deductions for a house mortgage or student loan interest are lost as a result of the repayment of those obligations.
- Keep in mind that the same reasons that may cause you to pay more state taxes may also cause you to owe more federal taxes.
What to Do If You’re In Debt to the Government
If you owe state taxes this year, you must make all required payments before the filing deadline. Otherwise, your state tax agency may levy fines and interest on your outstanding balance for each day it is not paid. This might lead to an increase in the amount you owe. You can pay with a check, a credit card, or a personal loan. If you are unable to pay your state tax payment in full, you must inform your state tax office immediately. Your state may let you settle what is owing through an installment payment plan, similar to how the IRS handles installment payment plans for federal taxes.
Be aware of the possible fees if you decide to pay state taxes using a credit card. Paying state taxes may become more expensive if you use a credit card with a high annual percentage rate. In this case, you should look for a credit card with a 0% introductory rate on purchases. Simply make sure you understand when the promotional period ends, so you know when the normal APR kicks in. Consider any processing costs levied by your state tax office for credit card payments as well.
How to Avoid Owing and Paying More in State Taxes
There are measures you can take to avoid having to wonder, why do you owe state taxes next year. Verify with your worker if your pay, filing status, and estimated deductions or credits are correct. You can alter your withholding if necessary by filing a new Form W-4.
If you’re self-employed, consider how much you’re going to pay in quarterly taxes. Estimated quarterly tax payments allow you to pay into the federal and state tax systems throughout the year instead of having your employer withhold taxes. You may need to raise your quarterly payments if you owe state taxes because you underpaid your quarterly taxes.
Consider any life changes that may have affected your tax return. For example, if you divorced or separated and had to change your filing status, it might affect how you are taxed. However, you may be able to offset the risk of a larger state tax payment by increasing your deductions or qualifying for tax credits.
Lastly, consider what you claimed for the most recent tax year in terms of credits and deductions. Then consider any credits or deductions you may be able to claim for the upcoming tax year. It’s possible that you’re overlooking important tax deductions that may save you money. Contributing to an IRA, for example, may entitle you to a tax break. You might potentially qualify for the retired saver’s credit.
Conclusion:
You may be wondering why you owe state income taxes if you do. Both the state and federal governments levy income taxes and several other types of taxation. State income taxes are deducted from your profits and paid to the state government. If you overpaid taxes via paycheck withholding, you may be eligible for a refund. Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming are seven states without an income tax.
The remaining 36 states and the District of Columbia share the same tax structure as the federal government. State income taxation is usually simpler than federal income taxation, with fewer tax brackets and lower rates. If you owe state taxes for the current tax year, you must make all required payments prior to the filing date. Bear in mind that if you use a credit card with a high annual percentage rate, you may incur additional costs. If you have fewer deductions this year than in prior years, you may have fewer goods to categorize.
As a result of repaying a mortgage or a student loan, deductions for those commitments are lost. Take into account your income, filing status, and anticipated deductions or credits. Consider your quarterly tax liability if you are self-employed. Take a look at the credits and deductions you claimed during the most recent tax year. It is conceivable that you are neglecting critical tax deductions that may result in significant savings.
