Taxes 101: Why do I owe state taxes?

Have you ever done your state tax return and been surprised at the balance due? Or wondered why you owe state taxes and federal taxes? You're not alone. In this guide, we decode the complexities of your state tax obligations.

Understanding your state tax obligations

State taxes differ significantly throughout the U.S., influencing your total tax bill. State taxes are crucial for funding local services and infrastructure. These taxes support public services like education, transportation, and public safety. To understand their importance and how they work, it's helpful to know that they can include income, sales, and property taxes, all of which help fund state government operations. Specifics can be found on the IRS state taxes overview. 

Why you might owe more than you expected

There are numerous reasons why you might owe more in state taxes than originally anticipated. For a comprehensive view, refer to the Taxpayer Advocate Service. The most common reasons include:

1. Under-withholding: If you didn’t pay enough in taxes throughout the year, you may owe a larger sum when filing your return. This can occur if you are self-employed or have multiple sources of income.

2. Freelance income: As an independent contractor or freelancer, you are responsible for paying the entire portion of your Medicare and Social Security taxes, often resulting in a higher tax bill.

3. Changes in tax laws: State tax rates and laws can change from year to year, impacting the amount you owe. 

Calculating your state tax liability

Understanding how state taxes are calculated can help you prepare for potential liabilities. We've prepared a step-by-step guide on calculating your state tax liability based on the State Income Tax Rates chart. The basics of calculating your tax liability are the same for most states, but it's always best to verify specific details with your state tax agency.

1. Determine your taxable income

Your taxable income includes all forms of income that are subject to taxation, including wages, interest, and dividends.

You'll also need to subtract your deductions, which can include things like charitable contributions and mortgage interest.

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2. Find your state's tax rate

The Tax Foundation offers an up-to-date list of state income tax rates, as well as other relevant information like the applicable brackets and standard deductions.

3. Calculate your state tax liability

Once you have your taxable income and applicable state tax rate, multiply the two to get your estimated state tax liability. For example, if your taxable income is $50,000 and your state's flat tax rate is 4%, then your estimated state tax liability would be $2,000.

Common errors that lead to unexpected state tax bills

A minor mistake on your state tax return can trigger a larger-than-expected tax bill. Here are some common errors to watch out for:

Failing to report all income sources

In navigating the often-tricky terrain of state taxes, it's crucial to be vigilant about the types of errors that can inadvertently inflate your tax bill. One common mistake taxpayers make is failing to report all sources of income, including interest from savings accounts, stock dividends, and even small freelance projects.

Misunderstanding tax credits and deductions

Another area where errors frequently occur is in the misunderstanding of tax credits and deductions. Misapplying these can increase your tax liability and trigger audits. But keeping up to date on credits and deductions can save you money, too, when applied properly. For example: Things like the child tax credit or the pet tax credit change with some frequency.

Inaccuracies in personal information

Additionally, inaccuracies in personal information, such as wrong social security numbers or misspelled names, might seem minor but can lead to significant processing delays and complications. Ensuring accuracy in these areas can mitigate the risk of unexpected state tax obligations and penalties.

Overlooking state-specific deductions and credits

A frequent oversight by many taxpayers is not taking full advantage of state-specific deductions and credits they’re entitled to. Each state offers a unique set of deductions and credits that can significantly lower your tax bill. Failing to research or apply these tax benefits properly can result in unnecessarily high state tax liabilities.

Incorrectly calculating estimated tax payments

For those who are self-employed or have significant non-wage income, estimated tax payments are a common requirement. An error often made is the incorrect calculation of these payments, either by underestimating income or not accounting for all taxable income sources. This miscalculation can lead to a substantial balance due when filing your state tax return.

What to do if you owe state taxes

If you owe state taxes, do not despair! There are options for payment plans, disputing errors, and seeking help. You can check State Tax Payment Plans for some guidance. In a nutshell,  here's what you can do if you owe state taxes:

1. Look into payment plans: Many states offer payment plans to help taxpayers meet their obligations without incurring penalties.

2. Dispute errors: If you believe there are errors on your tax bill, contact the appropriate government agency (such as the Department of Revenue) to dispute them.

3. Seek taxpayer advocate services: If you're struggling to resolve your state tax issues, you can seek assistance from the Taxpayer Advocate Service. This service helps taxpayers navigate through complex tax problems and disputes.

Frequently asked questions about state taxes

Q: What are the primary differences between progressive and flat state tax systems? 

A: Progressive tax systems impose higher tax rates on higher income brackets, increasing tax rates as income increases. Conversely, flat tax systems apply a uniform tax rate to all taxpayers regardless of their income level. 

Q: Can I deduct my state taxes on my federal tax return? 

A: Yes, state and local taxes, including income, sales, and property taxes, can be deducted from your federal tax return under the State and Local Tax (SALT) deduction, though this deduction is capped at $10,000. 

Q: When can I file my taxes for 2024?

A. Officially, taxes were due on April 15. But there are reasons and ways to file later, including extensions. Get updates on 2024 taxes here. 

Q: Do all states charge income tax?

A: Some states do not impose a personal income tax. These include Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. But always check your state regulations each year. Some states, like New Hampshire, don’t tax “earned income” but they may tax investment income or capital gains in certain years. 

Q: How do sales taxes affect my overall state tax burden? 

A: Sales taxes can significantly impact your overall state tax burden, particularly in states that do not levy a personal income tax. These states often have higher sales tax rates to offset the lack of income tax revenue. 

Q: Are property taxes considered part of state taxes? 

A: Yes, property taxes are a crucial component of state and local taxation systems. The revenue collected from property taxes primarily funds public services like schools, roads, and other local infrastructure. 

Q: What is the role of excise taxes, and how do they differ from sales taxes? 

A: Excise taxes are levied on specific goods and services, such as gasoline, cigarettes, and alcohol. Unlike sales taxes that are calculated at the point of sale, excise taxes are usually included in the price of the product. 

Q: Can moving to a different state affect my tax situation? 

A: Relocating to another state can have a substantial impact on your tax situation, especially if there are significant differences in tax rates and structures between your old and new states. 

Q: What are tax credits, and how do they differ from tax deductions? 

A: Tax credits provide a dollar-for-dollar reduction of your tax liability, while tax deductions reduce the amount of income subject to tax. Tax credits are typically more valuable than deductions because they directly reduce the tax due. 

Q: Are there any common state tax credits I should be aware of? 

A: Common state tax credits include those for education expenses, childcare costs, and renewable energy installations. The availability and specifics of these credits vary by state. 

Q: How do I find out more about my state’s tax laws and any potential changes? 

A: To stay informed about your state's tax laws and potential changes, it's best to consult the official state government website or contact a tax professional familiar with your state's regulations. 

Navigating state taxes can be as straightforward as understanding the rules of the game. With the right resources and careful planning, you can tackle your state tax responsibilities with confidence. Knowledge is power — arm yourself with it and take control of your tax situation. 

This blog post is provided "as is" and should not be relied upon as a substitute for professional advice. Some content in this post may have been created using artificial intelligence; however, every blog post is reviewed by at least two human editors.