Paying taxes is complex as much as it is inevitable. There are so many types of taxes you have to pay, and a lot of confusion around each. One of the many types of tax is state tax. There have been a lot of myths about what constitutes or does not constitute state tax. Differentiating between the misconceptions and realities can help you avoid getting into trouble with tax authorities. If you have a state tax issue, you can consult with a tax professional to help you navigate this murky road of paying state tax.
Every state has its tax rules, codes, and requirements. Some of these rules are similar to the federal tax rules while others are not. What are the actual rules that govern state tax? Below are the facts.
- You should pay state tax if you work in a state even though you do not live there
Whether you are a resident, nonresident or partial year resident, you should pay state tax in the state where you live and earn a living. You should also pay tax if you are using sources within the state to earn your income. For example, if you live in state X and you travel to work in state Y, you will pay state taxes in sate Y because you are earning income from there. You may also have to pay state tax in your own state X but not on the income you earned while in the foreign state.
- State and federal tax rules can be similar
State tax laws can be similar to federal tax laws. Some states use some of the federal rules in the state rules while others omit them entirely. Other states use flat rates for all taxpayers which are different from the bracketed rates use by the tax body IRS.
- State income tax is constitutional
While the constitution prevents discriminatory taxes and taxes that serve as a hindrance to interstate commerce, it does not in any way ban any forms of state taxes. State taxes have occasionally been challenged in court as unconstitutional, as it happened in 2015 when the court ruled that two states cannot tax the same income.
- You may or may not pay state tax in the state where your employer is located
Unless you worked where your employer is based, there is no obligation that you have to pay tax in that state. You can live in one area and work for a company which is in another state. In that case, you will pay state taxes in the state where you are working and not where your employer is based. If your employer happens to withhold taxes for that state, you can file a resident tax return to receive a refund.
- You are not obliged to file a return in a reciprocal state
There are states high sign reciprocity agreements that exempt nonresident employees from paying taxes in the state where they work. In this case, for you not to pay taxes in the state where you work, you have to present an exemption form to your employer to keep your taxes from being withheld in your work state.
- You may still have tax issues even after an audit gone well
State tax auditors aim to find mistakes that will make you pay more tax. Auditors may, therefore, skip errors in your return that would make your tax liability lesser than the stated amount. They will rarely outline an overstatement in your tax, so you have to be vigilant. Cross-check your returns for errors that may qualify for a refund, such as the emitting of a deduction.
- You may still pay tax if you are a nonresident working in a tax-fee state
If you are a non-resident working in a tax-free state, you may still pay your income tax to your home state. You will skip your tax obligation just because you earned income in a tax-free state.
Remember that you should not pay state tax on the same income twice. Knowing your state tax obligation can help you avoid getting into trouble with tax authorities. If you have any issue with your state tax, consult a tax professional.