Do you owe money this tax year? You may be thinking to yourself, “Why do I owe state taxes?”
Here you’ll learn more about state taxes, federal taxes, and why you may have a tax bill this year.
State Taxes vs. Federal Taxes
Most American citizens pay a federal sales tax as well as a state sales and income tax.
The Federal government requires each citizen to pay taxes, while 41 states require residents to pay taxes on a state level as well.
States that impose a state-level tax are:
- New Jersey.
- New Mexico.
- New York.
- North Carolina.
- North Dakota.
- Rhode Island.
- South Carolina.
- West Virginia.
Why Do I Have To Pay State Taxes?
The purpose of paying state income taxes is so your state has funds to perform various public services. Libraries, police officers, and more are all funded by taxpayers.
What Is Tax Liability?
Tax liability is the total amount of money owed in taxes by a company or individual. When doing taxes, you may find that you owe money on either a state or federal level. However, it is actually quite common for consumers doing their taxes to end up owing no money at all. In fact, people may even end up receiving money back from the government after completing their taxes.
What Can Affect My State Taxes?
Bringing in any kind of significant money can affect your state taxes. Some common circumstances that need to be reported on your state taxes are:
- Getting a new job.
- Getting married, divorced, or dealing with a deceased spouse.
- Children being or not being claimed as dependents.
- Withdraws from accounts such as 401(K), Social security, or IRA.
- Winnings from gambling or the lottery.
- Purchasing or selling a home or piece of property.
Starting a New Job
For most people, their job is their primary source of income. As such, workers in 41 states are required to report their income on their state taxes.
Taxes From a Previous Quarter (If You File Quarterly and Are Self-employed)
Suppose you pay taxes quarterly and do not pay off your tax liability in full each quarter. You may see these costs reflected in your following taxes filings.
Marriage or Divorce
Once married, couples may start filing their taxes jointly. This combines their incomes onto a single report. Keep in mind that filing taxes jointly may cause you to go up a tax bracket.
Death of a Spouse
Married couples who have been filing taxes jointly, combining both of their incomes, may see a significant change in their state taxes if one member of the couple passes away.
Birth of a Child
Dependents are individuals who are supported by a particular taxpayer. While dependents may be parents or loved ones if they are living with and financially supported by someone else, the most common type of dependent is a child. Parents who have children are able to claim them as dependents on their taxes.
No Longer Claiming a Child as a Dependent
When you claim a child as a dependent on your taxes, you are allotted a certain amount of money automatically. However, once your child moves out and financially supports themselves, you may no longer claim them as a dependent. This shift may lead to quite a difference in state taxes, especially if more than one child is no longer being claimed as a dependent.
Reporting Winnings for Gambling, or the Lottery
Depending on the amount, you may be required to report winnings if you happen to win the lottery or earn money through another form of gambling. Usually, if your winnings are a few hundred dollars or less, you do not have to claim anything. But, once the amount starts to get higher, gambling and lottery winners are required to claim their winnings as a form of income.
Withdrawing Social Security for the First Time
Social security is a government-sponsored form of funding granted to elderly citizens. While the purpose of this money is to financially assist people when they are older, people sometimes are able to borrow from their social security fund early. Borrowers are then required to pay taxes on the funds they request.
Taking Money From a Retirement Fund Like a 401(K) Or IRA
The purpose of a retirement account is to act as a form of financial stability once someone retires and no longer works. However, people can often take advantage of these accounts before they retire and withdraw money if they need. The only catch is that borrowers must pay taxes on the funding they take out of their retirement accounts.
Purchase or Sale of a Home
In most circumstances, the value of property only goes up. This increasing value is why homeowners are required to report their property as a form of income on their taxes. So, if you have just purchased or sold a home or piece of property, you may see a significant shift in your state taxes.
Reporting Profits From Investments
Investments can be a great way to earn some Recurring income. Just keep in mind that you must pay taxes on certain profits earned from these kinds of financial endeavors. If an investment does particularly well one tax season, you may find yourself owing a bit more than you normally do.
Deduction of Loan Interest
Some states allow people to claim the interest they pay on their home mortgages or student loans as deductibles on their taxes. Since most people are paying off student debt and mortgages for decades or more, it’s easy to get used to the interest deduction being a part of your regular tax return. For many, the deductible from mortgages or student loans is the make-or-break point of whether they will owe taxes or not.
What Should I Do if I Owe State Taxes?
What should you do if you owe taxes? If you aren’t receiving money back on your state income tax return this year, it is smartest to pay off what you owe as soon as possible.
Ways To Pay for State Taxes
Below are the most common methods people use for paying their state taxes.
Check or Automatic Withdrawal
If you have the funds in your bank account to cover your taxes costs, you can opt for an automatic withdrawal or send a check in the mail. By choosing automatic withdrawal, the IRS would simply withdraw the funds you owe directly from your checking or savings account. By selecting to send a check in the mail, you would write a check and send it to the IRS. Once received, they will process the payment, and you should see the funds removed from your checking account in approximately 1-3 weeks.
If you don’t want funds taken out of your bank account right away, you may opt to pay what you owe in state taxes using a credit card. However, this may not be the best idea if you owe a substantial amount in taxes. Credit card interest rates tend to be on the higher side, so if you use a card to pay your taxes, make sure you can cover the balance in a month or so.
Personal Installment Loans
People who owe a significant amount in taxes may consider taking out a personal installment loan. A personal installment loan from a direct lender may be the perfect financial solution for taking care of your financial needs when you owe state taxes. With perks like competitive interest rates, flexible terms, refinancing options, and varying loan amounts, it’s no wonder why personal installment loans are popular for paying off state taxes.
While bad credit installment loans may be a convenient choice for paying off state taxes, you will want to stay away from predatory options like fast payday loans online.
How To Avoid Owing State Taxes
Often, owing money on your state taxes is inevitable. Getting married, divorced, having children, purchasing property, and more are a common part of life for millions of people. If you know you are going to be making some of these big life moves, it may be best to try and save money for your estimated tax payments—that way, the expenses don’t cause as much financial hardship.
It may also be a smart idea to pay quarterly taxes instead of early taxes. If your situation stays the same, it should become pretty easy to find out your estimated quarterly taxes and financially prepare.
Some other tips for saving on or avoiding owing on state taxes are:
- Check for credit and deduction eligibility.
- Choose the correct withhold income tax option.
Does Every State Require Residents To Pay Income Tax?
No! Every state does not require its residents to pay state income taxes. There are nine states in the U.S. where residents do not have to pay taxes on their income. The states that do not have a state income tax are:
- New Hampshire.
- South Dakota.
9 States With No Income Tax