State Income Taxes
State income taxes are a relatively recent invention. Although they were introduced in Wisconsin in 1911, only 20 states imposed a tax on individual income prior to the 1960s.
Today, 43 states levy some form of state income tax, and they use a variety of methods to do it. Seven states—Colorado, Illinois, Indiana, Massachusetts, Michigan, Pennsylvania, and Utah—use one flat rate for income tax. The other 36 states have a series of income brackets and a tax rate that’s specific to each bracket. In 2014, these ranged from 0.36% on the lowest income bracket in Iowa to 13.3% on the highest income bracket in California.
Twenty-eight states use your federal adjusted gross income as the base for their own income tax. Eight states use the federal taxable income instead. And five of the 43 states use their own state income calculation in place of information from your federal income tax return.
And yes, there are seven states with no state income tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. These states fund themselves through severance taxes on natural resources, gasoline taxes, and sales and use taxes.
How do income taxes work in your state? A tax professional or other financial adviser can help you understand your state’s system and how it applies to you and your property.
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