Preparing and Filing your State Tax Return

It’s that time of the year again when you have to stress yourself about that annoying income tax return. Unless you’re lucky that you live in one of the few states that d not have income tax, such as Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming.

Where to Begin:

Before anything else, you have to make sure that your federal return is accurate and complete. Your federal return is always the starting line for just about every state income tax return. If not, don’t even bother thinking of preparing your state return.

Adjusting your Federal Income to State Income:

Once you have verified that the information from your federal return is accurate, you can now enter them on your state income tax return. You will need to make some additions or subtractions to it to reconcile the differences between your federal taxable income and your state taxable income. One of the adjustments that you will need to make is addition which are usually add-backs of any federal deductions that you have taken but are not permitted on your state return or income items. They may not be allowed since they are tax-exempt for federal purposes, but are taxed at the state level. On the other hand, subtractions should be done for income items that are taxable under federal tax law, but are tax-exempt under state tax law. Also, subtraction is done for state-specific deductions. The adjustments that you need to make on your tax return will depend upon the extent your state conforms to the federal tax code.

Common Additions:

Below are the common state additions to federal income:

  • Bonus depreciation
  • Interest on municipal bonds from other states
  • Moving expenses
  • Student loan interest

Common Subtractions:

Below are the common state subtractions from federal income:

  • Deduction for federal income taxes, only if your state offers this deduction
  • Social Security and other retirement benefits that are taxed federally
  • Contributions to your state’s 529 college savings plan
  • State income tax refunds
  • State lottery winnings

Figuring your State Tax Liability:

After you have calculated your taxable income for state income tax purposes, you will come up with your gross state tax liability. Most states implement tax brackets with tax rates that depend on income. For instance, tax rates increase as income increases. To calculate your tax, a table is necessary. However, there are a few states that have one flat tax rate that all taxpayers pay regardless of the amount of income.

Calculating your Tax Due:

Once you have your tax liability, you will need to  reduce that by any state tax credits that you are qualified for. States have varied tax credits, but many have their own types of child tax credits and earned income credits. Most tax credits can only reduce your tax liability to zero. However, there are some refundable tax credits, which are treated as a payment of tax with any leftover credit that you refund.

Filing Your State Income Tax Return:

After preparing your state income tax return, you are now ready to file it. Nowadays, people prefer to do it electronically since it is more convenient. To have a more accurate return, you can make use of a software program. You can also get your refund faster if you file and choose direct deposit electronically as well. If you’re not aware of these software programs, you can check out your state’s website. For instance, some states have purchased tax software programs like Turbo Tax, which includes a state tax return preparation to make your life a lot easier.

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