How to Prepare and File State Taxes

A woman sits at her dining room table with laptop doing her taxes
•••

RichVintage / Getty Images

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.

Where to Start

The starting point for just about 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, some of it for free. The 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 2020 income must have been $72,000 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 $57,000 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. Not all are open or operating at full capacity during the coronavirus pandemic in tax season 2021, however. This is the season in which you'll file your 2020 tax 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 conforms to and 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 2020. All taxpayers there pay the same percentage of income regardless of their incomes:

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

Most states have tax brackets just like the federal government, however, 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 websites 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 a payment toward any tax you owe. But 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 states' website 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.