How State Income Taxes Work

The calculation, in four steps

Almost every state that taxes income follows the same sequence, even though the numbers differ enormously.

1. 1Start from a federal figure. Most states begin at federal adjusted gross income; several — Colorado, North Dakota and Iowa among them — begin at federal taxable income, which already has the federal standard deduction removed.
2. 2Add back and subtract state-specific items. States commonly add back interest on other states’ municipal bonds, and subtract their own bond interest, military pay, or retirement income.
3. 3Subtract the state’s deduction and exemptions. Some states offer a generous standard deduction, some offer none at all and use a personal exemption instead.
4. 4Apply the rate schedule, then credits. Nine jurisdictions have no schedule at all. A growing group applies a single flat rate. The rest apply graduated brackets, where each rate touches only the income inside its own band.

Which state gets to tax you

Residency, not citizenship or where your employer is headquartered, is what matters. A state taxes its residents on all their income wherever earned, and taxes non-residents on income sourced within its borders.

That creates the possibility of being taxed twice on the same dollar. Every state that taxes income offers a credit for taxes paid to another state, which usually resolves it — you effectively pay the higher of the two rates rather than both.

Moving mid-year normally means filing a part-year return in both states, splitting income by when you earned it. A change of address alone is rarely enough to establish residency.

Why the numbers vary so much between states

Two states with identical statutory rates can produce very different bills, because the rate is applied to a different base. A state with a 5% rate and a $15,000 standard deduction takes less from a $60,000 earner than a state with a 4% rate and no deduction.

This is why we publish the tax actually owed alongside the rate on every page. The rate answers a question about the tax code; the bill answers the question you asked.

Local income taxes

A substantial minority of states allow at least some cities, counties or school districts to levy their own income tax on top of the state’s. In Maryland every county does; in Pennsylvania and Ohio hundreds of municipalities do; in Indiana all 92 counties do.

Where local tax applies it can add one to four percentage points, which is more than the gap between many states. We flag which states permit it and give representative rates, but our headline figures never include it, because the rate depends on exactly where you live.