How To Pay State Taxes – The Comprehensive 2021 Guide

Taxes are every state or nation’s lifeblood. Under the social contract theory, every financially-able citizen with a stable income source must pay a certain percentage proportional to their earnings as taxes. These taxes are in exchange for security, infrastructure, social services, and other state-provided benefits.

State taxes actually may impact your life more directly than federal taxes, since they pay for things that you use every day (roads, schools, libraries, etc.). In fact, parks and other public recreation is usually paid for by state and local taxes.

Taxes also pay for prison systems, and important programs like Medicaid. Federal taxes, by contrast, may seem more abstract, as you are very unlikely to directly see the benefits yourself.

Unfortunately, while paying taxes is necessary, it doesn’t mean it’s that easy. Most of the time, tax filing can be overwhelming and daunting. If it’s your first time filing your taxes, and you’re wondering how to go about it, here is a cheat sheet on how to make tax filing easier

Ask Whether Or Not You Need To File Taxes

Before you file your taxes, make sure first if you have to. Otherwise, you’ll just be wasting your time. If you have to pay taxes, take note of your income, age, and tax filing status. The amount of tax you have to pay will depend on these factors and whether you have a tax dependent.

Check if you’re qualified for a tax break or a tax refund. You need to focus and give time on tax filing if your circumstance is in any way similar to the following:

  • Your income tax had been withheld from your monthly paycheck.
  • You already made estimated tax payments, or you had your tax refund applied for this year’s estimated tax.
  • You’re qualified for tax credits.

Know How Taxes Are Determined

The government is responsible for determining how much tax every taxpayer must pay in taxes each year. They do this by dividing your taxable income into tax brackets. Each bracket is taxed according to the corresponding rate.

The good thing about this is regardless of what bracket you’re in, you won’t be obligated to pay a tax rate that’s equal to your income. It would only be a corresponding portion of such income amount.

Under the U.S. progressive tax system, citizens with higher incomes must pay higher income tax rates. Conversely, people belonging to the lower-income bracket are also subject to only pay lower income tax rates.

Gather All Applicable Tax Filing Info

Whether you’re filing your taxes by yourself or working with a tax preparer, you need to go through this process. This step’s primary purpose is to provide monthly income evidence, prove expenses that can be considered tax-deductible, win a tax credit, and gather proof that your taxes have been already paid within the year.

To make things easier, especially for first-time tax filers, we round up a short version of a tax prep checklist. Here are the items that you need to prepare:

  • Social Security numbers of the tax filer, his or his spouse, and any/all dependents;
  • Tax filers’ W-2 form to reflect everything that he earned the past year, and how much taxes he has already paid;
  • 1099 forms reflecting information on whether or not somebody other than one’s employer paid or gave him money;
  • Contributions on retirement account;
  • Mortgage interest and property taxes;
  • Donations to charity;
  • Taxis one paid to the state and local government;
  • Educational expenses; and
  • The previous year’s state and federal tax returns.

Choose A Way To File Your Taxes

You can file your taxes in three different ways — filling out Form 1040-SR or Form 1040 manually and mailing it, filing through tax software or online, or working with a personal tax preparer.

It’s easy to use online tax software if you’ve tried it in the past. However, if it’s your first time to do so, you can use TaxSlayer, TaxAct, H&RBlock, or TurboTax to file your taxes online. Any of these software packages offer an online, on-screen, or on-demand access to The tax pros who can answer all your tax questions, check your tax returns, and file taxes online on your behalf.

You can also use the IRS’s very own free file software to prepare your tax documents. You need to meet an adjusted gross income amounting to $72,000 to qualify.

If you want to file your tax online through a secured portal for tax preparers, you need to get in touch with a human tax preparer first. Your chosen tax preparer will then email you the link to their portal.

After this, you’ll have to set up a password before uploading your tax files and other requirements. If your tax preparer got questions or needs you to sign documents, he or she would send them through the portal.

To make things easier, the portal will send email notifications when there are changes to your documents. You will also use the same portal to check if your tax returns are completed or for review.

If you need to sign it, all you have to do is have it electronically signed before sending it back. You can also print the document, manually sign it, and upload the signed document to the portal.

Settle Your Taxes With The IRS

If you’re ready to settle your tax obligations to the IRS, know that you can do so via cash, checks, debit or credit cards, wire transfers, or electronic payments. Fortunately, if you can’t pay your taxes in full immediately, you can also take advantage of the federal tax agency’s long-term and short-term tax payment plans. We’ve discussed these options in a separate article, so you can also check that one out for a lengthier discussion.

If you’re waiting for a tax refund, you can fast-track the release of such a refund to your bank account. One of the tricks to have your refund hit your bank faster is to file your tax refund application online.

When done on paper, the processing takes place for about six to eight weeks. When done digitally, this will only take three weeks or less. This process shortens the turnaround time, thus, making it more convenient for the taxpayer.

Filing your tax return may be overwhelming, but things can get done faster and more efficiently if you know the workaround. For any questions or if you need more information on any tax-related concerns, you can always refer to the IRS website.

Which State Has The Highest State Tax?

New York has the highest state tax in the nation. They not only have the highest state income tax, but they also have the highest overall tax burden of any state.

They have one of the highest property taxes in the country (in addition to the highest income tax), which means living in New York can be extremely costly. Hawaii is the second-highest, though the nice weather there somewhat offsets the slightly higher tax burden.

The states next on the list also have nearly comparable tax rates, so they are not that far off from New York’s state tax rate. For example, Illinois may be #9 on the list, but their overall tax rate is only 3% less than New York.

Their income tax rate is only 2% less, though Illinois does not offer nearly as many benefits as living in New York. Other oddities on the list include Minnesota and New Jersey, which have surprisingly high tax rates.

While a state tax rate may seem like a small issue, if you make a large amount of money, it can save you quite a bit to live in a state with a lower state tax. In fact, some states have no state income tax at all (though they usually charge more taxes in other areas).

Federal taxes will take most of your income, but state taxes take an additional percentage of it. For example, you might pay a 25% federal income tax – but then your state may take an additional 3%.

This means 28% of your income (over 1/4) – is simply gone. This is one of the many reasons why the lowest earners (and the highest earners) frequently complain loudly about taxes.

If you make a large amount of money from winning a prize (either through the lottery or via a game show) – you will get taxed even more. Federal income taxes are bracketed, which means the more you earn, the more you get taxed.

While state taxes are sometimes not bracketed, even 3% of $1 million dollars works out to be quite a lot of money. If you’re making only $30,000 per year, and a lot of your money is going to federal taxes – an extra 3% to state taxes can really hurt.

What States Have No Taxes?

It may surprise you to learn that some states do not have any state income taxes. We should clarify here and say that these states are not completely tax free – they just do not impose any state income taxes on individuals.

It should also be noted that in these states, there are almost always higher taxes for other areas. This could manifest as higher sales tax, road taxes, hotel taxes, or any number of other (somewhat unusual) taxes.

That being said, there may still be some monetary benefit for you, if you reside in a state with no income taxes. You will still have to pay your federal income taxes, but if you make a lot of money – eliminating state income taxes can put more money in your pocket.

These states have no state income tax for their residents:

  • Alaska
  • Florida
  • Nevada
  • New Hampshire
  • South Dakota
  • Tennessee
  • Texas
  • Washington
  • Wyoming
  • Tennessee (taxes interest and dividends, though this is being phased out)
  • New Hampshire (taxes interest and dividends, though this is being phased out)

Why Do We Pay State Taxes?

State taxes are due to be paid because of tax laws, which impact local taxes, as well. These taxes go to lots of state and local services (with federal income taxes going towards funding federal programs).

Public services, like roads, libraries, parks, and more – are all funded by the average taxpayer. In fact, taxes are one of the few truly bipartisan issues – though different political parties argue over just who should be taxed, where those taxes should go, and at what rate taxes should be imposed.

Additionally, in many ways, state taxes have much more of a direct impact in your daily life. Whereas federal taxes go towards everyone’s quality of life – state taxes impact your state directly (and possibly even your local life).

State and local governments also are much more likely to need the money – whereas the federal government always seems to have money to spend. Taxes also go towards vital programs like Medicaid, which provides health care and services for lower income citizens.

Even sales taxes go towards beneficial programs. One area of contention, however, is that corporations usually pay very little in taxes – especially compared to the public.

Most state taxes go to welfare, public housing, and the aforementioned Medicaid. Some state tax revenue goes to education programs, but nearly as much as most people would prefer.

Local governments make the actual decisions, when it comes to determining how tax revenue is spent, and at what rate its citizens are actually taxed. If you want to raise (or lower) local or state taxes, you need to start some kind of campaign, and bring it to the appropriate level of your local (or state) government.

What Happens If You Don’t Pay State Tax?

If you pay your federal taxes, but don’t pay your state taxes, any tax refund you may have been given – will now likely be forfeited. Essentially, there is no way around paying your state taxes, so it’s better to do so, as soon as possible.

If you wait, you will end up paying more, but for the same taxes. That’s because you’ll be paying a late penalty, interest, and possibly other fees – all on top of the original state tax amount that you owed to begin with.

Is Living In A State With No Income Tax Better?

In some ways yes, in other ways no. You won’t actually be paying less in taxes, in most cases.

This is because states and local governments will raise taxes in other areas, to make up for the lost income tax revenue. For example, your state might impose a higher-than-usual sales tax, if they have no state income taxes.

One situation that makes living in a income tax free state better? If you’re earning a lot of money.

You won’t have to pay 2-4% of your income to the state, and you may end up paying less in other areas. This is sometimes possible, but in states like Florida and Alaska, the other taxes are usually so high, that you don’t end up saving much money.

How Do States With No State Tax Make Money?

Though some states may not have income taxes – they usually have abnormally large sales taxes and/or property taxes. This is how states with no income taxes make money.

In fact, if you have a big property, you may end up paying more in property taxes, than you would have had you simply paid income taxes. Sales tax is another subtle one – and there’s no way around it.

No matter what you buy, you are going to pay sales tax. Some states (like Delaware), have no sales tax whatsoever, which does help you save on bigger purchases.

Which State Has The Lowest Property Tax?

Hawaii has the lowest property tax rate, overall. However, it also has the second highest overall tax burden of any state, which means that Hawaii may not be the best place to live, if your only goal is to save money on taxes.

Property tax is one of the biggest ways states can make money, if they do not require you file state income taxes. And the bigger the piece of property you own – the more property tax you have to pay.

In fact, property taxes can be a very big burden – and they are usually forgotten about, by the average consumer. Hawaii itself is a little bit of a mixed bag, since they offer low property tax – but have a very high tax burden, overall.

Which State Is The Most Tax Friendly For Retirees?

When you talk about overall tax burden, you need to consider not only state income taxes, but property taxes – and even a death tax. If you’re retired, the death tax might actually be something more pressing, which is a bit frightening.

The combination of no sales tax, and very low property taxes mean it’s extremely cheap to live in Delaware – especially if you are retired. There are also no inheritance or estate taxes in Delaware, which means the cost of living goes down even further.

These taxes specifically target the passing down of wealth amongst generations, so it’s very important for retirees. In Delaware, you can also exclude some of your pension and retirement revenue from your income taxes – which is yet another benefit to living in the state.

Other Factors To Consider For Paying State Taxes

Due to COVID-19, many of us may have trouble paying the full amount due on state taxes. This may also be the same for federal income taxes.

However, as long as you file by the due date, you will likely have no issues. The IRS offers payment options (as do states), so you will be able to make income tax payments, if you are not able to pay the full amount.

There is a payment system for nearly every kind of tax issue, and the following options should almost always be available for state tax payments.

  • Debit card (i.e. Visa, Mastercard, American Express, etc.)
  • Money order
  • ACH (automated clearing house)

If you own a business, be sure to pay the appropriate state business tax, as well. Each tax year, we all must pay the full amount due on our income tax – and the tax due will ideally be paid either in advance (or at least by the tax deadline).

There are no exceptions to this rule – either for federal, or state taxes.

Income tax does not need to be paid in other areas of your financial life, like when using a credit card (though you will pay sales tax on items you purchase). And it should be noted that filing an accurate tax return is crucial to staying out of any potential financial trouble.

The Bottom Line On Paying State Income Taxes

There is simply no way around paying your state income taxes – unless you live in a state that does not impose them. Often, state taxes can be forgotten, though they certainly shouldn’t be.

Each state will tax you at a different rate, and many states have strange and obscure taxes that are unique to their geographic region. Alaska is one of the most famous cases, as they have many odd taxes, largely due to their lack of state income taxes.

Federal taxes (and the IRS) get a lot of focus, but the hidden issues with many people’s tax returns can be state-level. You must be absolutely sure that you check every box, pay every amount, and do so on time.

Since state taxes are different than federal income taxes, and often have many tricky areas, we highly recommend you utilize the services of a qualified tax professional. They will make sure your state tax returns do not have any errors, are filed properly, and are also filed on time.

Taxes are universal – we all have to pay them. It is, however, important to understand the key differences between state taxes and federal taxes, as they are not at all the same thing.

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