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In addition to federal income tax collected by the United States, most individual U.S. states collect a state income tax. Some local governments also impose an income tax, often based on state income tax calculations. Forty-one states, the District of Columbia, and many localities in the United States impose an income tax on individuals. Eight states impose no state income tax, and a ninth, New Hampshire, imposes an individual income tax on dividends and interest income but not other forms of income (though it will be phased out by 2025). Forty-seven states and many localities impose a tax on the income of corporations.[1]
State income tax is imposed at a fixed or graduated rate on taxable income of individuals, corporations, and certain estates and trusts. These tax rates vary by state and by entity type. Taxable income conforms closely to federal taxable income in most states with limited modifications.[2] States are prohibited from taxing income from federal bonds or other federal obligations. Most states do not tax Social Security benefits or interest income from obligations of that state. In computing the deduction for depreciation, several states require different useful lives and methods be used by businesses. Many states allow a standard deduction or some form of itemized deductions. States allow a variety of tax credits in computing tax.
Each state administers its own tax system. Many states also administer the tax return and collection process for localities within the state that impose income tax.
State income tax is allowed as an itemized deduction in computing federal income tax, subject to limitations for individuals.
- ^ States with no individual income tax are Alaska, Florida, Nevada, South Dakota, Texas and Wyoming. States with no corporate income tax are Nevada, South Dakota, and Wyoming. For tables of information on state taxes, see, e.g., 2009 State Tax Handbook, CCH, ISBN 9780808019213 (hereafter "CCH") or later editions, or All States Handbook, 2010 Edition, RIA Thomson, ISBN 978-0-7811-0415-9 ("RIA") or later editions.
- ^ Exceptions are Arkansas, Iowa, Mississippi, New Hampshire (interest and dividends only, phased out from 2023 and eliminated in 2025), New Jersey, and Pennsylvania, none of which use federal taxable income as a starting point in computing state taxable income. Colorado adjusts federal taxable income only for state income tax, interest on federal obligations, a limited subtraction for pensions, payments to the state college tuition fund, charitable contributions for those claiming the standard deduction, and a few other items of limited applicability. See 2010 Colorado individual income tax booklet Archived 2010-12-25 at the Wayback Machine.