It’s almost tax season, which means you’ll have to file for both federal and state returns. Yes, these two tax returns are very different from one another, and failing to complete one can result in significant charges from back taxes. Here are the major differences between federal tax returns and state tax returns.
State Tax Returns
Federal tax returns must be completed no matter where you live, but some states have chosen to opt out of state taxes. People who live in Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming don’t have to file state income taxes. Residents of New Hampshire and Tennessee are exempt, but they do have to pay tax on dividends and income from any investments.
Filing Status
According to federal law, couples who are married on the last day of the year can file joint returns and save money on taxes by increasing their household income level. However, they have the choice to file separately even if they are married. This status often prevents one or both spouses from claiming certain deductions or other taxes breaks. For example, one spouse may use certain itemized deductions, which prevents the other from doing so.
States may permit alternative filing for married couples. In some states, including Arkansas, Delaware, and Georgia, married couples can file joint returns or combined returns. All other states choose to tax each spouse separately. If both spouses have income, the alternative filing status allows each spouse to benefit from low tax rates at the beginning of the tax rate schedule.
Retirement Income
After you retire, retirement accounts are usually taxed as income, but some states have a broad range of tax breaks for pension accounts, 401(k)s, and IRAs. These breaks can differ from state to state. For example, Alabama exempts civil service and government pensions, while Arizona only excuses $2,500 per year. Connecticut exempts 100% of military pay. Under federal law, Social Security benefits may be includible in gross income or may be entirely tax-free, depending on the recipient’s other income.
Itemized Deductions
Some states offer additional deductions to what the federal law offers, while others may not include all federal deductions. For example, some states don’t provide deductions for contributions to a health savings account. Others give residents a limited deduction for contributions to their state’s 529 plans. These deductions can vary from state to state, and it can be difficult to know what applies to your area. You can ask a tax return professional or visit your state’s website for more information.
Tax Preparation Cost
One of the biggest differences between filing your state and federal taxes is the cost of preparation. Many online services will file your federal taxes for free but may charge you to file your state taxes.
According to CBS News, you can file your state taxes for free in 23 states, but everywhere else will cost. If you choose to visit a location to have a professional prepare your taxes, it can cost anywhere from $159 to $447 based on how complicated your returns for both federal and state taxes are.
