Nobody enjoys doing their taxes… nobody. And that is one of the many reasons why I do what I do. It’s complicated and nuanced. There are a lot of boxes to check (literally).
One particularly frustrating part of the tax return process is finishing your federal filing, and realizing that you need to go through the same process for your state taxes. My Mount Vernon clients come to me all the time to clean up messes that were created in their filing because something wasn’t considered or done correctly. It’s hard to pay attention to the demands of federal and state taxes when they’re so different.
At times there are two languages when it comes to state tax vs federal tax. Which can make navigating the differences troublesome. So, today I’ll be your translator — talking you through a few common issues I see when it comes to the difference between state tax vs federal tax.
The first, and most obvious difference is that the IRS handles federal income taxes, while each state has its own collection agency and unique tax systems. Federal tax rates and brackets are standardized nationwide. But state tax rates and brackets vary wildly.
Also, what you can deduct or claim as a credit federally might not even exist at the state level. Even the enforcement methods differ. The IRS might place a federal tax lien, while a state might garnish your wages directly.
Here’s what I mean by “wildly different” with state tax vs federal tax. In California, you’re subject to a 13.3 percent income tax if you make over 1 million. Contrast that with states like Florida, Nevada, Washington, and others that have no personal income tax at all (though this doesn’t necessarily mean you’ll pay less taxes).
All that is to say — if you make a habit of moving states (or working in multiple states), you’ll want to be aware of a few tax changes that can throw you a curveball. Here are a few examples of things that can present a challenge when it comes to state tax vs federal tax:
- Moving or working remotely. Some people don’t realize that simply changing your address or working from a different state can create a tax obligation in that new state. If you earn income in one state but live in another, you might owe income taxes to both if the states do not have a reciprocity agreement. This gets even more complicated if your employer is in one state, you live in another, and work in a third. Each state has its own rules about residency and sourcing income, and navigating these can be a nightmare.
- State sales tax. States have different rules about what’s taxable and at what rate. If you’re a business owner, keeping track of these varying sales tax laws across different states can be a significant administrative burden. Failing to collect or remit the correct sales tax can lead to penalties and interest that also vary from state to state.
- Property taxes are typically administered at the local level, but state laws often set the framework. Property tax rates, assessment methods, and exemptions vary significantly from state to state, and even county to county. Disputes over property tax assessments are common and often require the expertise of a local tax professional. Furthermore, some states have unique taxes, like…
- Estate or inheritance taxes are separate from federal estate taxes. These can catch families off guard and create significant financial burdens during an already difficult time. Like all these other taxes and regulations, amounts vary from state to state.
- Unfiled returns at the state level can lead to serious consequences, including penalties, interest, and even criminal charges in some cases. I talk a lot about the IRS’s aggressive approach to collecting tax debts, but states are often even quicker to pursue aggressive collection actions when it comes to unfiled returns.
If you do stumble in any of these areas, state collection notices (like IRS notices) will show up in your Westchester County mailbox. If you receive one after this tax season, don’t ignore it. Read it through. Then give me a call to determine next steps.
There are different battle tactics we’ll want to take depending on whether your issue is at the state or federal level. We may be requesting a Collection Due Process hearing, while simultaneously negotiating a state installment agreement if you’re dealing with both.
Whether you’re dealing with state tax vs federal tax, conflicts are overwhelming and sometimes downright devastating. It’s always best to take a look at potential issues proactively, especially this time of the year.
calendly.com/l-karam/prospect-schedule
Here for you (no matter your state),
Lynn Karam