State Income Taxes

The IRS isn't the only tax headache you may have.

In addition to the federal income tax, more than 40 states also impose an income tax on those who live within the state's borders, or who live elsewhere but earn income within the state. Many cities now impose an income tax as well. These taxes are generally based on the adjusted gross income a taxpayer reports to the federal government, with additional modifications for taxes paid to another state, additional deductions for interest earned on bonds issued by the state or cities in the state, and sometimes with income added back in.

For example, Alabama and New Jersey allow taxpayers to deduct more for medical expenses than the federal government permits, but Colorado, Illinois, and other states require you to add your federal deduction for state income taxes back into your taxable income.

Like the IRS, state revenue departments look with great disfavor upon those who fail to file their tax returns on time or fail to pay the taxes they owe, and many of the remedies used by the IRS will be used at the state level as well. Because state income tax laws vary so widely and change so frequently, it's important to get personal advice from an accountant or another tax professional for any questions you may have about the specific laws in your state.