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This article was fact-checked by our editors and Christina Taylor, MBA, senior manager of tax operations for Credit Karma Tax®. It has been updated for the 2020 tax year.
If your state requires you to file state income taxes, you may need some extra help maximizing your state tax refund.
For taxpayers in most states, filing a federal income tax return is only half the battle. To finish the job, filing state income taxes may also be required.
After you’ve invested so much energy in filing your federal income taxes, you may be tempted to hurry through your state return. But don’t play down their importance — depending on where you live, filing your state income taxes could come with its own set of challenges.
Here are some important things that you’ll need to know to maximize your state tax refund.
- 1. Filing state income taxes requires a separate return
- 2. Not all states have a state income tax
- 3. You may have to file more than one state tax return
- 4. You may have to deal with different taxes, deductions and credits
- 5. Your state income tax refund may be taxable
1. Filing state income taxes requires a separate return
If your state requires that you file state income taxes, you’ll have to do it separately from your federal income tax return. That’s because the federal government and your state’s government are separate, and you file and pay income taxes to each separately.
While some of the information on your federal and state income taxes is the same, your state may have other taxes, deductions and credits that apply to you.
Also, because the IRS doesn’t process your state tax return, it can’t help you if you have any questions. Instead, visit your state’s Department of Revenue or Department of Taxation website to learn more about your state taxes, download state tax forms and ask questions.
However, even though you’re filing two separate returns that are received and processed by two separate government agencies, if you e-file your state and federal returns through the same filing service, they will be linked in the e-filing system. If you plan to e-file your own taxes, it may be beneficial to use a single filing service, rather than filing your state return with one and your federal with another, advises Julie Magee, director of tax regulatory affairs for Credit Karma.
“Have you ever noticed when e-filing your return it can take 12 to 36 hours to get an acceptance confirmation from the state, while the IRS usually sends one in just a few hours?” Magee says. “This is because the IRS and states have collaborated on various identity-proofing processes over the years, and many states won’t accept a return that’s not electronically linked to a federal one. Just like you, the state is waiting on the acceptance message from the IRS.”
“When you use two separate services to file your state and federal returns, the returns aren’t linked in the e-filing system,” she explains. “Using the same software means you’ll have just one submission ID, which can help prevent the state from rejecting your electronically filed return.”
2. Not all states have a state income tax
Only 41 states plus the District of Columbia have a state income tax that includes salary and wages. Two states — New Hampshire and Tennessee — tax only interest and dividend income, and the following seven states don’t have any income tax at all:
- South Dakota
If you live in one of these seven states and didn’t earn income in any other state, you’re off the hook.
3. You may have to file more than one state tax return
If you’ve moved during the year or have worked in two or more different states, you may need to file an income tax return in each state where you’ve lived and worked.
“If both states collect income taxes, then the employers will withhold state income taxes for their respective states,” says Lydia Desnoyers, owner of Desnoyers CPA LLC. “Come time to file your state income tax returns, you would be taxed on a prorated basis.”
Note, however, that this may not apply if you live in one state and work remotely for a company in another state.
If you live in one state and commute to another where you work, things can get trickier. If the two states have a reciprocal tax agreement, filing state income taxes may be required only in the state where you live.
What’s more, some states even have special tax forms just for their full-year residents who work in a reciprocal state. Indiana, for example, has a form called IT40-RNR to address situations like this. Check your state requirements for an additional tax forms you may need to file if you earned income other than wages, salaries, tips or commissions in your resident state.
If you reside in one state but work in another, you’ll need to find out if these states have a reciprocal tax agreement to determine where you’ll pay taxes. It’s important to note you may need to file a state withholding exemption form with your employer to make those wages exempt from tax in the state you work in. Learn which states have reciprocal agreements and what each state requires.
4. You may have to deal with different taxes, deductions and credits
Your employer will typically withhold only state and local income taxes from your paycheck, but you may also owe local taxes and other taxes, depending on where you live. For example, Ohio, has a school district tax in many of its school districts that requires a separate return to be filed in addition to your state income tax return. Ohio has city tax returns for their taxing municipalities, so you could be filing up to three tax returns if you’re filing in Ohio.
“You would usually see certain withholdings at the federal level that are not at the state level,” says Desnoyers. “For example, Social Security and Medicare taxes are withheld for federal tax purposes, but you would typically only see state income taxes withheld at the state level.”
You may also qualify for certain deductions and credits that don’t show up on your federal tax return. For example, some states offer a deduction or credit for contributions you make to a 529 College Savings Plan, while others offer great deductions for age and/or retirement income. To learn more about your state’s taxes, deductions and credits, visit your state’s Department of Revenue or Department of Taxation website.
5. Your state income tax refund may be taxable
When filing your federal income tax return, you have the option to itemize certain deductions rather than taking the standard deduction that the tax code offers.
One of the things you can include in your itemized deductions is your state and local income taxes. (Tax reform has affected this deduction.) If you do deduct these taxes and receive a state or local income tax refund (or credit or offset) during the same year, you technically overstated your deduction and paid less taxes than you should have.
As a result, you generally must include your refund (or credit or offset) as income on the following year’s federal tax return.
Filing state income taxes can feel like an afterthought to your federal tax return, but knowing the ins and outs of your state’s tax code can boost your state tax refund.
Credit Karma Tax® supports e-filing for most states that require income taxes. They can walk you through filing your single-state income tax return, and offer step-by-step guidance along the way.
By working with a tax preparation service, you’ll find deductions and credits that you might not find on your own, and can avoid mistakes along the way.
Relevant sources: Handbook for Authorized IRS e-File Providers of Individual Income Tax Returns | Understanding Employment Taxes | Alabama Department of Revenue | Alaska Department of Revenue — Tax Division | Arizona Department of Revenue | Arkansas Department of Finance and Administration | California Part-Year Resident and Nonresident | Colorado Department of Revenue Taxation Division | Connecticut Department of Revenue Services | Delaware Division of Revenue | District of Columbia Office of Tax and Revenue | Florida Department of Revenue | Georgia Department of Revenue | Hawaii Department of Taxation | Idaho State Tax Commission | Illinois Department of Revenue | Indiana Department of Revenue | Iowa Department of Revenue | Kansas Department of Revenue | Kentucky Department of Revenue | Louisiana Department of Revenue | Maine Revenue Services | Comptroller of Maryland | Massachusetts Department of Revenue | Michigan Department of Treasury | Minnesota Department of Revenue | Mississippi Department of Revenue | Missouri Department of Revenue | Montana Department of Revenue | Nebraska Department of Revenue | Nevada Department of Taxation | New Hampshire Department of Revenue Administration | New Jersey Department of the Treasury, Division of Taxation | New Mexico Taxation & Revenue Department | New York State Department of Taxation and Finance | North Carolina Department of Revenue | North Dakota Office of State Tax Commissioner | Ohio Department of Taxation | Oklahoma Tax Commission | Oregon Department of Revenue | Pennsylvania Department of Revenue | Rhode Island Division of Taxation | South Carolina Department of Revenue | South Dakota Department of Revenue | Tennessee Department of Revenue | Texas Comptroller’s Office | Utah State Tax Commission | Vermont Department of Taxes | Virginia Department of Taxation | Washington Department of Revenue | West Virginia State Tax Department | Wisconsin Department of Revenue | Wyoming Department of Revenue
Christina Taylor is senior manager of tax operations for Credit Karma Tax®. She has more than a dozen years of experience in tax, accounting and business operations. Christina founded her own accounting consultancy and managed it for more than six years. She co-developed an online DIY tax-preparation product, serving as chief operating officer for seven years. She is the current treasurer of the National Association of Computerized Tax Processors and holds a bachelor’s in business administration/accounting from Baker College and an MBA from Meredith College. You can find her on LinkedIn.