How To Prepare and File Your State Tax Return

Tax time is admittedly stressful. Not only do you have to worry about your federal tax return, but there's also that state income tax return to deal with unless you live or work in one of the states that don't have an income tax.

All states allow you to amend your tax return if you make a mistake, but having a basic knowledge of the fundamentals of tax preparation can go a long way toward avoiding errors with your state taxes.

Where To Start With State Income Taxes

The starting point for almost every state income tax return is your federal return. You'll want to be sure that your federal tax return is accurate and complete before you begin preparing your state return. That doesn't have to be a challenge because you have numerous options for assistance, and some are free.

The Internal Revenue Service (IRS) offers Free File, an alliance between the agency and some leading tax software providers that will prepare your federal return free of charge. Your annual income must be below a certain amount to qualify.

You might also qualify for Volunteer Income Tax Assistance (VITA), although the income limitation for this program is stricter. Generally, your income must be $60,000 or less unless you're disabled or have limited English language skills.

Tax Counseling for the Elderly (TCE) also offers free federal tax return preparation if you're age 60 or older.

Both programs are managed by the IRS. Volunteers are available at neighborhood locations.

Adjusting Your Federal to State Income

Begin making adjustments after you've entered the information from your federal tax return—Form 1040—onto your state income tax return. You must reconcile the differences between your federal taxable income and your state taxable income.

Some of these adjustments will be additions. They're usually add-backs of any federal tax deductions that you might have taken that aren't allowed on your state return. They might also be income items that are tax-exempt for federal purposes but are taxed at the state level.

Other adjustments will be subtractions. These are usually income items that are taxable under federal tax law but are tax-exempt under state tax law. Some of these subtractions can also be state-specific deductions.

Additions to State Taxes

Common state additions to federal taxable income include:

• Bonus depreciation
• Interest on municipal bonds from other states
• Moving expenses
• Student loan interest

Subtractions From State Taxes

Common state subtractions to federal taxable income include:

• Deduction for federal income taxes, if your state offers this deduction
• Contributions to your state’s 529 college savings plan
• Social Security and other retirement benefits that are taxed federally
• State income tax refunds
• State lottery winnings

Figuring Out Your State Tax Liability

You'll find your gross state tax liability after you've calculated your taxable income for state income tax purposes.

Nine states have one flat tax rate. All taxpayers in these states pay the same percentage of income regardless of how much they earn:

• Colorado
• Illinois
• Indiana
• Kentucky
• Massachusetts
• Michigan
• North Carolina
• Pennsylvania
• Utah

Two additional states charge a flat tax on certain income. New Hampshire has a flat tax on interest and dividends only, while Washington's flat tax only applies to capital gains income of high earners.

However, most states have progressive tax brackets like the federal government, with tax rates that increase as income rises. You'll have to use a table to calculate your tax in these states.

State Income Tax Credits

You can reduce your state tax liability by any state tax credits that you qualify for. State credits can vary widely, but many states have their own versions of child tax credits and earned income credits.

Most tax credits can only reduce your tax liability to zero. They're treated as payment toward any tax you owe.

Some credits are refundable. Any leftover credit after eliminating your tax debt would be sent to you as a tax refund.

How To File Your State Taxes

Preparing and filing your state income tax return electronically is the preferred method for tax compliance. You'll have a more accurate return if you use a tax software program, and you'll get your refund sooner if you e-file and choose direct deposit rather than have the IRS mail you a check.

Purchased tax software programs, such as TurboTax, usually include state tax return preparation for most states. Check the list of states available with the product you're considering before you purchase the software to be sure your state is included.

Let's look at an example state income tax return. For the state of New Jersey, your tax return can be filed after filling out Form NJ-1040. New Jersey residents need to fill in their personal information, filing status, exemptions, dependents, and then income. Total gross state income goes on line 29. After deductions, your taxable income goes on line 42. After filling in the rest of the form, you'll see the tax you owe on line 54. There are several more lines to fill out—the New Jersey Form 1040 is four pages long—and you can find addresses for where to send the form at the end.

Each state will have a Form 1040 that is specific to its state and residents You can likely find your state tax forms on your state's tax website.

Frequently Asked Questions (FAQs)