While federal tax law controls your life on April 15 each year, the state and local taxes you pay are determined by your location. Here’s a look at 10 state and local taxes that affect your local tax liability each year.
State Income Tax versus Federal Income Tax
Your federal income tax return is one thing and your state income tax return is another. So it’s important to understand the difference between state and federal income tax. State taxes vary depending on your location because no one system covers state taxes all fifty states. Each individual state levies state taxes. And state income taxes are due every year. Most states, like the federal system, use a progressive tax system. That means the higher your income is, the more you pay in taxes.
Federal income taxes, however, apply to everyone in every state and are due each year. Federal income taxes also based on a progressive tax system that uses seven marginal income tax brackets that apply to filing status.
Filing your federal income tax is more straightforward because the same guidelines apply across the country. However, when filing state taxes, you need to familiarize yourself with the state where you live to get the most up-to-date and accurate information available before filing your tax return.
Here are 10 state and local taxes that vary depending on where you live within the U.S.—including Alaska and Hawaii, of course.
1. State Income Tax
Perhaps the most obvious tax on the list. States use income tax revenues to fund everything from infrastructure—other than interstate highways—to state parks. States collected between 0 and 13.3% percent, but this number varies state to state and depends on your total income.
Your state of residence determines if and how you’re taxed or not taxed just for being a resident of that state. Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming don’t require residents to pay state income taxes. Those states though still find the revenue from other sources, such as sales taxes, utility taxes or property taxes. And some states require both state income taxes and sales, utility and/or property taxes too.
2. Local Income Tax
A local income tax is charged in addition to state income taxes and may be charged based on the school district you live in or another localized group. Property taxes are not considered local income taxes. And only a small number of localities charge local income taxes. The number that do charge local income taxes tends to decrease yearly as most city and county budgets are determined by the state.
The revenue generated by local income taxes is often used to fund local programs, including education programs, parks and overall efforts to improve the community.
3. Sales Tax
Sales tax applies to the sale of goods and services. The money is collected from the consumer at the point of purchase. And some states charge higher sales tax to compensate for not charging other state income and other taxes. For example, Nevada doesn’t charge income tax but does charge more than 8% sales taxes.1 Alaska, Delaware, Montana, New Hampshire and Oregon are sales-tax free. New Hampshire has no sales or state income tax. And Utah—and other states—has both a state income tax and almost 7% sales tax.
You can deduct sales taxes from your federal tax return if you itemize your deductions.
4. Utility Tax
Most Americans have to pay taxes for the utilities they use, such as water, natural gas, electricity, cable TV, waste and more. Utility taxes can be imposed at the state, county, city or town level. State law governs utility taxes and each state has its own laws for these taxes.
You can’t, unfortunately, deduct utility taxes you pay from your federal tax bill.
5. Property Tax and Real Estate Tax
This tax usually applies to people who own homes, vacant residential lots or recreational property. Property taxes vary from state to state and county to county. Property tax rates are determined by and paid to the county where you own property. It can also apply to specific items you own, such as cars, boats and RVs.
To determine property tax for a house and the lot it sits on, counties do an appraisal of the value of each home in the area. The taxes assessed to the property are based on the estimated value of nearby homes and the size of the lot. There are also different classifications for each property including residential, commercial, industrial and vacant real property. Each one of these classifications is taxed differently.
Property taxes are levied by the local government on a county or municipal level. Nationally, property taxes were an average of 1.15% in 2017.
Property taxes help fund local education and local government. Tax revenues from property taxes are also used to help fund medical services and local police and fire protection.
The term real estate taxes can be used to describe property taxes. Property taxes are real estate taxes, but not all property taxes are charged on actual real estate. The boats and RVs mentioned earlier are property and subject to property taxes, but not real estate taxes. And even though, those of us who pay an annual registration fee on our cars, may not think of those fees as property tax, they are.
6. Sin Tax
Sin taxes are local tax payments levied against things seen as morally questionable—or sinful—such as alcohol, tobacco, gambling and various other vices. Sin taxes are levied by states as a way for the government to dissuade people from purchasing these products.
7. Value-Added Tax
Value-added tax (VAT) is a tax charged on some retail goods where a value—that is taxed—is added at the point of retail sale. It tends to work itself into the mix when foreign travel is involved. For example, many Americans who travel may experience a VAT on certain products they buy domestically, but not on those same products when purchased in their country of origin—such as high-end purses produced in France.
8. Public Transportation Fare
This might seem out of place on this list, but transportation fares are a form of tax. Since our taxes already fund various types of infrastructure—such as roads and bridges—fares allow residents of a city to utilize public transportation. Additionally, because some citizens are offered a discounted fare due to income, general fares are calculated to cover those losses. That makes public transportation fare a form of tax.
Tuition paid to any state-run university is actually a form of tax. Local governments used to subsidize many of the tuition costs associated with college, but today, the cost is increasingly shifted to students and their parents.
Exclusions and Exceptions to Some Local and State Taxes
With the many different taxes levied from state to state, there are also some exclusions that exist. For example, several products are excluded from sale taxes in some states or subject to a lower sales tax than other items. These products typically include food, clothing and medicine. There are also tax-exempt groups that don’t have to pay some or all local and state taxes, such as charitable organizations, schools and churches.
Depending on the state, some allow local communities to tax real property, such as items attached to the land. Some states can also tax computers, equipment, tools and furniture. To find out what qualifies for taxation in your state, review the state revenue site for your individual state.
Filing Your Taxes
When it comes time to file your taxes this year, you’ll find that your state taxes may increase, the tax withholding tables are different, and several deductions have disappeared. The standard deduction for some state taxes has increased, but not for every state. Before filing, you may want to meet with a tax advisor to go over any changes in your state’s tax law.
Tax time is a great time to check your credit reports and your credit score. You can check your three credit reports free once a year at annualcreditreport.com. To track your credit more regularly, you can check your Experian credit score and get a Credit.com free Credit Report Card with an easy-to-understand breakdown of your credit score using letter grades. Credit.com upgrades your score and your report card, if applicable, every 14 days
This article was last published March 30, 2018, and has since been updated by another author.