State Income Tax - Individual Income Tax

Individual Income Tax

Forty-three states impose a tax on the income of individuals, sometimes referred to as personal income tax. Tax rates vary widely, with the highest marginal rate being 13.3% in California. The income subject to tax varies by state. Some states impose the tax on Federal taxable income with minimal modifications, while others tax a measure bearing little resemblance to Federal taxable income.

The states imposing an income tax on individuals tax all taxable income (as defined in the state) of residents. Such residents are allowed a credit for taxes paid to other states. Most states tax income of nonresidents earned within the state. Such income includes wages for services within the state as well as income from a business with operations in the state. Where income is from multiple sources, formulary apportionment may be required for nonresidents. Generally, wages are apportioned based on the ratio days worked in the state to total days worked.

All states that impose an individual income tax allow most business deductions. However, many states impose different limits on certain deductions, especially depreciation of business assets. Most of the states allow non-business deductions in a manner similar to Federal rules. Few allow a deduction for state income taxes, though some states allow a deduction for local income taxes. Eight of the states allow a full or partial deduction for Federal income tax.

In addition, some states allow cities and/or counties to impose income taxes. Most Ohio cities and towns impose an income tax on individuals and corporations. By contrast, in New York only New York City and Yonkers impose a municipal income tax.