Why do I owe state taxes? You may be wondering to yourself when you file a return, particularly if you don’t generally owe your state money each year. State taxes are different from federal taxes, and each state has different regulations regarding its taxation.
What are state taxes?
Taxes are assessed at several levels, including federal, state, and local. At the federal level, your taxes are assessed on your income and are progressive, so that you’re taxed at a higher rate when you have more income.
State taxes vary – some states don’t charge an income tax at all (Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming) while a state like New Hampshire doesn’t charge on salary and wages, but does charge tax on income from interest.
In states that do assess an income tax, they may charge a flat tax or progressive tax. There are currently nine states that use a flat tax where everyone pays the same percentage of tax regardless of their income: Colorado, Illinois, Indiana, Kentucky, Massachusetts, Michigan, North Carolina, Pennsylvania, and Utah. The remaining states generally use a progressive tax, where the more you make the higher tax you pay.
States may also assess other types of taxes beyond income tax, including sales tax, property tax, gasoline tax, and more.
Why do I owe state taxes?
If you owe state taxes, it’s likely because you did not withhold enough of your income throughout the year. This could be because your income increased and it bumped you into the next tax bracket (if your state has a progressive tax system) or if you haven’t updated your withholdings in several years.
An increase in your income could also impact your ability to claim tax credits, which lower your taxable income, resulting in money owed for your tax return. Depending on the state, the amount that you claim in deductions may also vary your return, causing you to owe money for your state taxes. If you are itemizing your deductions and have fewer deductions than in previous years, it may change how much you’re able to lower your taxable income, which could result in you owing state taxes. Some states give additional deductions -for example, Pennsylvania allows for 529 contributions and HSA contributions deductions – working with a financial planner can help you determine which deductions you may be eligible for.
There are various life events that could change your tax status, which may impact your state withholdings and return. For example, if you change jobs or start bringing in income from a second job. Getting married, divorced, or becoming widowed will impact your tax status. Adding to your family by having a child or adopting a child also impacts your tax status. If you’re self-employed, check your estimated quarterly withholdings because you may be under withholding if you owe on your state taxes.
As you age, there are additional events that could impact your tax status with the state. When your children are no longer your dependents, it impacts your deductions and could cause you to owe on your state taxes. If you’ve reached retirement and are taking money from an IRA or 401(k), these events could impact your taxes. Taking your Social Security benefits may result in a change in your tax status.
There are additional events to keep an eye out for throughout the year that can change your tax status – from buying or selling your home to earning capital gains on an investment, or even paying off a loan such as your mortgage or student loan as those events cease the interest payments that would earn you deductions.
What should I do if I owe state taxes?
If you owe state taxes, you need to pay them. Working with an accountant and a financial planner can help you be prepared for your tax bill next year, and ensure that you’re paying the correct amount in any quarterly payments throughout the year if necessary.
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