State income tax vs. federal income tax
Your federal return goes to the IRS; your state return (if your state has one) goes to your state’s own tax agency, like a Department of Revenue or Franchise Tax Board. The state return is independent of the federal return, but many states start with the numbers calculated when completing your federal return. Additionally, many states have separate credits that reduce the amount you owe or increase the amount you are refunded when your state return is completed and filed.
Which states don’t have income tax
States that currently have no income tax include:
- Alaska
- Florida
- Nevada
- New Hampshire
- South Dakota
- Tennessee
- Texas
- Washington
- Wyoming
Flat tax vs. progressive tax states
Some states charge everyone the same rate no matter their income, known as a flat tax rate. Others use a progressive tax rate, where your rate climbs as your income rises, similar to the federal system.
If you live in one state and work in another
Your state of residence generally taxes all your income, while the state where you work may also tax what you earned there. The situation may vary based on each state’s tax laws. Depending on the two states involved, you could end up filing more than one return, or you may benefit from a reciprocity agreement (an agreement where commuters only pay taxes to their state of residence).
Do no-tax states really save you money?
Even if your home state doesn’t have an income tax, it doesn’t mean you’re skipping taxes altogether. States without an income tax typically lean harder on sales tax, property tax, or other fees to fund the same services. So, your overall tax obligations and savings depend on your specific spending and homeownership situation, not just your paycheck.
