Individual
and Corporate State Income Tax
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Most states
require you to pay personal income tax.
State and local property tax bills may
offer some flexibility when prepaying
taxes.
State income tax is an income tax in the
United States that is levied by each
individual state. Seven states choose to
impose no income tax. These states are
Alaska, Florida, Nevada, South Dakota,
Texas, Washington, and Wyoming.
Additionally, New Hampshire and
Tennessee limit their state income taxes
to only dividends and interest income.
See Current
Individual and Corporate
State Tax Rates
As of May of 2010, the
highest rate of state income tax is that
of Hawaii, with a maximum rate of 11%.
Of those states which impose an income
tax, the lowest maximum rate is that of
Illinois, which levies a flat tax of 3%.
Most states (34) have a progressive
income tax, where the rates rise as the
income grows higher.
Some state and local taxes (including
state income taxes) are deductible for
federal tax purposes. Due to Alternative
Minimum Tax, or AMT, itemization may not
yield much tax savings on a federal
return. For those not affected by AMT,
the federal government effectively
subsidizes a portion of an individual's
state income tax, but only for
individuals whose total deductions are
greater than the standard deduction.
In addition, some states allow cities
and/or counties to impose income taxes
above and beyond the federal and state
income taxes.
If you make
estimated income tax payments, mailing
the fourth-quarter installment by Dec.
31 earns you the deduction in the
current year — even if part of the
payment is returned to you via a state
tax refund the following spring.
But, the payment has to be based on a
reasonable estimate of your actual state
tax bill.
You may have similar flexibility with
state and local property tax bills. In
some areas of the country, these bills
are mailed out in the fall, but they
don't have to be paid until January of
the following year. Beating the deadline
by paying before year-end lets you claim
the tax savings a year earlier.
Itemized Deductions
If you itemize, you have the option of
claiming your state and local sales tax
or state and local income tax for the
year. Be sure to determine which amount
will be larger, because you can't claim
both.
If you choose to deduct income tax,
include your withholding and estimated
tax payments for the current year as
well as any balance due from a prior
year. If you credited an overpayment
from last year's return to his year's
estimated tax payment, be sure to
include that amount too.
If you choose to deduct sales tax, you
can deduct either the actual amount you
paid or the amount from the table in the
Schedule A instructions. You can add the
sales tax you pay on a car to the amount
in the table as well as other items
specified in the instructions.
Use the IRS Sales Tax Deduction
Calculator to see if your taxes could
benefit.
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