How to Prepare and File State Taxes

A woman sits at her dining room table with laptop doing her taxes
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Tax time is admittedly stressful. Not only do you have to worry about your federal tax return, but there's also that state income tax return to deal with unless you live or work in one of the nine states that don't have an income tax.

All states allow you to amend your tax return if you make a mistake, but having a basic knowledge of the fundamentals of tax preparation can go a long way toward avoiding errors.

Key Takeaways

  • You'll use your completed federal return when filling out your state return, so make sure your federal return is accurate and complete.
  • Once you've carried over the information from your federal return, you'll make additions or subtractions according to your state's tax laws.
  • Calculate your tax liability using your state's tax rates.
  • For the fastest submission and refund, file your state tax return electronically.

Where to Start

The starting point for almost every state income tax return is your federal return. You'll want to be sure that your federal return is accurate and complete before you begin preparing your state return. That doesn't have to be a challenge because you have numerous options for assistance, and some are free.

The Internal Revenue Service (IRS) offers Free File, an alliance between the agency and some leading tax software providers that will prepare your federal return free of charge. Your 2021 income must have been $73,000 or less to qualify.

Some Free File providers will prepare your state return for free as well, or at least for a minimal charge.

You might also qualify for Volunteer Income Tax Assistance (VITA), although the income limitation for this program is stricter. Generally, your income must be $58,000 or less unless you're disabled or have limited English language skills.

Tax Counseling for the Elderly (TCE) also offers free federal tax return preparation if you're age 60 or older.

Both programs are managed by the IRS. Volunteers are available at neighborhood locations. However, available services may vary due to a limited number of qualified volunteers for the 2022 tax season—the year in which you'll file your 2021 returns.

Adjusting Your Federal to State Income

Begin making adjustments after you've entered the information from your federal return onto your state income tax return. You must reconcile the differences between your federal taxable income and your state taxable income.

Some of these adjustments will be additions. They're usually add-backs of any federal tax deductions that you might have taken that aren't allowed on your state return. They might also be income items that are tax-exempt for federal purposes but are taxed at the state level.

Other adjustments will be subtractions. These are usually income items that are taxable under federal tax law but are tax-exempt under state tax law. Some of these subtractions can also be state-specific deductions.

The number of adjustments you'll make on your state tax return will depend on the extent to which your state follows the federal tax code.

Additions to State Taxes

Common state additions to federal taxable income include:

Subtractions from State Taxes

Common state subtractions to federal taxable income include:

  • Deduction for federal income taxes, if your state offers this deduction
  • Contributions to your state’s 529 college savings plan
  • Social Security and other retirement benefits that are taxed federally
  • State income tax refunds
  • State lottery winnings

Figuring Your Tax Liability

You'll find your gross state tax liability after you've calculated your taxable income for state income tax purposes.

Nine states have one flat tax rate as of 2021, the return you'll file in 2022. All taxpayers in these states pay the same percentage of income regardless of how much they earn:

  • Colorado
  • Illinois
  • Indiana
  • Kentucky
  • Massachusetts
  • Michigan
  • North Carolina
  • Pennsylvania
  • Utah

Two additional states charge a flat tax on certain income. New Hampshire has a flat tax on interest and dividends only, while Washington's flat tax only applies to capital gains income of high earners.

However, most states have progressive tax brackets like the federal government, with tax rates that increase as income rises. You'll have to use a table to calculate your tax in these states.

Most tax preparation software programs offer interactive calculators for free.

Calculating Your Amount Due

You can reduce your state tax liability by any state tax credits that you qualify for. State credits can vary widely, but many states have their own versions of child tax credits and earned income credits.

Most tax credits can only reduce your tax liability to zero. They're treated as payment toward any tax you owe.

Some credits are refundable. Any leftover credit after eliminating your tax debt would be sent to you as a tax refund.

How to File Your State Taxes

Preparing and filing your return electronically is the preferred method for tax compliance. You'll have a more accurate return if you use a tax software program, and you'll get your refund sooner if you e-file and choose direct deposit rather than have the IRS mail you a check.

Many state websites have lists of free software programs you can use.

Purchased tax software programs, such as TurboTax, usually include state tax return preparation for most states. Check the list of states available with the product you're considering before you purchase the software to be sure your state is included.

Frequently Asked Questions

How do you file an extension for state taxes?

If you need more time to file your state tax return, your first stop should be your state's taxing authority. Call or visit your state's website to see what forms you'll need to file. Each state will have different requirements. Your state may issue an automatic extension, but it's important to double-check because you can face penalties if you get it wrong.

What happens if you don't file your state taxes?

If you owe state taxes and you neglect to file your return, you face penalties, fees, and interest in addition to the tax you owe. And if you fail to file due to attempted fraud, you could face jail time, too.

How do you file taxes in a different state?

If you live in one state and work in another, check to see whether your state has tax reciprocity with neighboring states. If so, you may only need to file taxes with your home state. Otherwise, you may need to file a nonresident state tax return with the state you worked in. If you moved from one state to another during the year, you'll have to file multiple part-year tax returns: one for the state you used to live in and one for the state you live in now.

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