Overview

State and local governments set their own tax rules and priorities. That means a taxpayer who follows federal law can still face different state or local tax outcomes for the same transaction or income. These divergences affect individuals, retirees, remote workers, and businesses that operate in more than one jurisdiction. (See IRS general guidance and state revenue departments for specifics.)

In my work advising clients, I repeatedly see the same causes of surprises: states “decoupling” from federal provisions, different treatment of deductions and credits, and residency/source rules that reallocate income across states.

Key areas where state and local rules commonly differ

  • Conformity vs. decoupling: States decide whether and when to “conform” to federal tax code changes. Some states fully adopt federal changes; others “decouple” and maintain their own rules. For background, see our glossary entry on Decoupling (State Taxes).
  • Itemized deductions and the SALT cap: Federal law limits the state and local tax (SALT) deduction in certain circumstances, but states vary on how they report and treat those amounts for state returns. Read more on the State and Local Tax (SALT) Deduction and practical planning options in our SALT workarounds article.
  • Mortgage interest and property taxes: The federal rules for mortgage interest and allowable property tax deductions may not match state rules for calculations, timing, or caps — which can change the benefit of itemizing at the state level (see our homeowner tax guide for deeper detail).
  • Retirement income and exclusions: States differ on whether pensions, Social Security, and retirement-plan distributions are taxed or excluded.
  • Business deductions and apportionment: States use different apportionment formulas, sourcing rules, and disallow specific federal deductions; multistate businesses must compute state taxable income separately from federal taxable income.
  • Credits and timing differences: A federal credit may not exist at the state level, or states may allow refundable credits when the federal credit is nonrefundable.
  • Residency and sourcing: State residency tests and where income is “sourced” (work performed, property location, etc.) drive state tax liability for remote and mobile workers. See our guide on Filing State Taxes for Remote Workers: Residency Rules.

Short examples (realistic scenarios)

  • A homeowner who itemizes on the federal return finds the state disallows some mortgage-interest adjustments, increasing state tax owed.
  • A business taking a federal deduction for compensation finds that a high-tax state limits that deduction for state taxable income, creating a state-only tax adjustment.
  • A remote worker moves midyear; both the old and new states claim portions of wage income under their residency and withholding rules.

Practical steps to reduce surprises

  1. Confirm state conformity: Check whether your state “automatically” conforms to federal changes or requires legislative adoption (state revenue department website).
  2. Run a state-level calculation before filing: Use tax software or request a pro to compute state taxable income separately from your federal return.
  3. Track residency and days: For multistate earners, keep a day-by-day record and document where work was performed.
  4. Keep detailed records: Save receipts, closing statements, and support for deductions that states may scrutinize differently than the IRS.
  5. Consider tax planning moves early: Timing income, credits, and deductions can change the split of federal vs. state benefit.

Common mistakes I see

  • Assuming federal compliance equals state compliance.
  • Overlooking state-specific add-backs or subtraction adjustments on state returns.
  • Failing to file or allocate income correctly after a move or a period of remote work.

When to consult a professional

Hire a CPA or state-focused tax advisor if you: have multistate income, significant itemized deductions, sizable retirement income, or complex business apportionment. In my practice, clients who run a state-level mock return first avoid the largest surprises.

Quick checklist before you file

  • Confirm your states conformity status and any recent legislative changes (state revenue site).
  • Recalculate itemized vs. standard deduction at the state level.
  • Verify residency status and source rules for income.
  • Review state-specific credits and AMT rules.

Authoritative sources and further reading

Professional disclaimer: This article is educational and does not constitute tax advice. For guidance tailored to your situation, consult a licensed tax professional or CPA.