Background

State income taxes developed independently from federal rules as states created their own revenue systems to fund schools, highways, and services. Over time states adopted different tax bases and structures—some use progressive brackets, some a flat rate, and a few have no personal income tax at all.

Key differences you should track

  • Taxable income definitions: States often start with federal adjusted gross income (AGI) but add or subtract items (for example, state tax refunds, certain municipal bond interest, or state-specific exemptions). The result: your state taxable income can be higher or lower than your federal taxable income.
  • Rates and brackets: States set their own rates—progressive or flat—and different brackets. These change more frequently than federal law in many states (see Tax Foundation for state rates) (https://taxfoundation.org/).
  • Deductions and credits: Some states offer a standard deduction or allow itemized deductions; others limit or disallow specific federal-itemized items. The SALT deduction limit ($10,000 cap for many taxpayers) affects federal itemizing but state rules for deducting local taxes vary. For SALT details, see IRS guidance (https://www.irs.gov/).
  • Capital gains and preferential treatments: The federal government taxes long-term capital gains at special rates; many states tax capital gains as ordinary income with no preferential rate.
  • Residency and sourcing rules: States apply different residency tests (domicile vs. statutory residency) and income-sourcing rules that determine when out-of-state income is taxed by a state.

Real-world examples

  • Moving states: In my experience advising clients who relocate, a move from a high-rate state (e.g., California) to a no-income-tax state (e.g., Texas) often reduces state liability immediately, but you must satisfy residency rules to change tax status.
  • Multistate work: Employees or contractors who live in one state and work in another can face withholding and filing requirements in both states. See our guide to allocating income across states for practical steps and worksheets (Multistate Income Tax: How to Allocate Income Across States).

Who is most affected

  • People who move or maintain homes in multiple states.
  • Remote workers and commuters who earn wages in states where they don’t live.
  • Businesses operating in multiple states that must apportion income and comply with different corporate tax rules.

Practical tips

  1. Confirm residency rules early: Read your destination state’s rules on domicile and part‑year residency—missteps create unexpected taxes and audits. Our article on residency tests explains common traps (State Income Tax Residency Tests: Domicile vs Statutory Residency).
  2. Review state add‑backs and subtractions: Compare your federal AGI to the state starting point and watch for common state add‑backs like excess business losses or retirement income preferences.
  3. Track days and ties: Keep a calendar of work days, home addresses, vehicle registrations, and voter registration if you change states—these facts support residency claims.
  4. Use software or a CPA for multistate returns: Filing multiple state returns is error-prone; tax software or a tax pro helps allocate income correctly and spot credits.

Common mistakes to avoid

  • Assuming state rules mirror federal law: That assumption causes missed filings, denied deductions, and penalties.
  • Overlooking state credits: Many states offer credits (for dependent care, renter’s credit, earned income credits) that reduce liability more than federal options in some cases.
  • Failing to file a part‑year or nonresident return when required: This is a frequent trigger for audits.

Frequently asked questions (short answers)

  • Do I always get a federal deduction for state taxes I pay? Not necessarily—the federal SALT deduction is limited (see IRS guidance) and state treatment of deductions varies.
  • If I work remotely for an out‑of‑state employer, who pays state tax? Residency and employer withholding rules determine obligations—both the employee and employer can have responsibilities.

Professional disclaimer

This content is educational and does not replace personalized tax advice. In my practice advising taxpayers and small businesses, I recommend consulting a qualified tax professional or state revenue department for specific cases.

Authoritative sources

Internal resources

(Edited for clarity and accuracy — updated 2025.)