State Income Tax

A state income tax is an income tax imposed by a state rather than by the federal government. Each state writes its own law, so the rate structure, the starting point, the deductions and the credits differ from state to state, and states differ even on whether to impose an income tax at all. That variation is why a general page cannot state anyone's rate: the reliable source for a particular state is that state's own revenue department, and for many people more than one state's rules apply in the same year.

What can be described generally is the part fixed by structure rather than by any single legislature. A state return typically begins from a figure carried off the federal return, commonly federal adjusted gross income, and then applies the state's own additions, subtractions, deductions and credits. That coupling, usually called conformity, is why a change in federal tax law can raise or lower a state tax bill without a state legislature doing anything, and why a state sometimes passes a law specifically to decouple from a federal change.

Two grounds for taxing, and they can both apply to the same dollar. A state may tax a resident on all of their income, wherever it was earned. A state may also tax a nonresident on income sourced within it, most commonly wages for work physically performed there, income from a business operating there, and rent or gain from real property located there. Someone who lives in one state and works in another therefore has two states with a legitimate claim on the same wages. This is the ordinary case rather than an edge case, and the system's answer to it is a credit rather than an exemption.

The resident credit, and the constitutional floor under it. A resident state generally allows a credit for income tax paid to another state on income that both states tax. In Comptroller of the Treasury of Maryland v. Wynne (2015) the Supreme Court held that Maryland's personal income tax scheme violated the dormant Commerce Clause because it did not give residents a full credit for income taxes paid to other states. The Court observed that, unlike most other states, Maryland did not offer such a full credit, and applied the internal consistency test to conclude that the scheme operated like a tariff on interstate activity. The practical reading is narrow but useful: a resident credit is not merely a courtesy that a state may withdraw at will. What the credit does not do is equalise rates. It is generally capped at the home state's own tax on that income, so a resident of a lower-tax state who works in a higher-tax one ends up paying the higher of the two.

Residency is a test, not a fact, and there is more than one of them. States distinguish domicile, which is the place a person treats as their permanent home and which changes only when a new one is established, from statutory residency, which some states apply to anyone maintaining a place of abode in the state and spending more than a threshold number of days there. Because the two tests are independent, a person can satisfy one state's domicile test and another state's statutory residency test in the same year and be a resident of both. The detail of those tests, and of the day-count records that decide them, belongs to the state tax residency page.

Federal law caps what a state may reach in one important case. 4 U.S.C. 114, headed "Limitation on State income taxation of certain pension income," provides that "No State may impose an income tax on any retirement income of an individual who is not a resident or domiciliary of such State." The definition of retirement income is broad, covering distributions from qualified plans, simplified employee pensions, 403(a) and 403(b) arrangements, individual retirement plans, section 457 deferred compensation plans, governmental plans, military retired or retainer pay, and payments made as substantially equal periodic distributions over life expectancy or a period of at least ten years. This settles a widespread and expensive belief. A state where a pension was earned cannot tax the payments once the recipient has genuinely moved away, which is a matter of federal law rather than of that state's generosity.

The federal deduction is a separate subject. Paying state income tax may produce a federal itemized deduction, subject to a cap, and that deduction is governed entirely by federal law. It belongs to the SALT deduction page and has no bearing on what any state charges. Local income taxes charged by some cities, counties and school districts run on their own authority again.

For someone whose income is entirely from one state, the sequence is short: the federal return is prepared, a figure from it starts the state return, the state's own adjustments are applied, and the state's rates produce the tax. The interesting case is the two-state one, and it runs in a specific order.

1. File the nonresident return first, for the state where the income was sourced but the taxpayer does not live. It taxes only the income sourced there.

2. File the resident return second, for the state of residence. It taxes all income, wherever earned.

3. Claim the resident credit on the resident return for the tax paid to the other state, generally limited to the amount the resident state itself would have charged on the same income. The order matters because the credit needs the other state's number.

A hypothetical example of the credit doing its job. Elena lives in State R and earns a salary of $120,000, of which $30,000 was earned working at a client site in State S.

• State S taxes the $30,000 as nonresident-sourced income. Assume its tax on that is $1,500.
• State R taxes all $120,000. Assume its tax before credits is $6,000.
• State R's tax attributable to the $30,000 is $6,000 × ($30,000 ÷ $120,000) = $1,500, so the credit is $1,500.
• State R tax after the credit: $6,000 − $1,500 = $4,500.
• Total state tax: $4,500 + $1,500 = $6,000, exactly what she would have paid had she earned everything at home.

Now change one number. If State S's tax on that income had been $2,300 because its rates are higher, the credit is still capped at State R's own $1,500. Elena pays $2,300 to State S and $4,500 to State R, a total of $6,800. The credit prevents double taxation; it does not protect her from the higher of the two rates.

What the structure gets right

• Conformity to the federal starting point means most filers do not compute income twice, and one set of records supports both returns.
• The resident credit resolves the ordinary overlap between a state of residence and a state of source without either having to give up its claim.
• Federal law removes the hardest version of the problem for retirees by barring a former state from taxing retirement income.
• Because states set their own rules, a taxpayer's state tax outcome is responsive to a decision they actually control, which is where they live and work.

The honest difficulties

• Two states can each satisfy their own residency test on the same person in the same year, and nothing automatically resolves it.
• The resident credit is generally capped at the home state's own tax on the income, so working in a higher-tax state costs the difference.
• Withholding follows the employer's registration rather than where the work happened, so a wrong work location can produce a year of withholding to the wrong state and two returns to fix it.
• Conformity cuts both ways: a federal change can raise a state bill with no state vote behind it, and a state that decouples creates differences the filer has to track.
• The rules genuinely differ by state, so general guidance can identify the question but cannot answer it for a particular person.