Income Tax in The United States - State, Local and Territorial Income Taxes

State, Local and Territorial Income Taxes

Income tax is also levied by most U.S. states and many localities on individuals, corporations, estates, and trusts. These taxes are in addition to federal income tax and are deductible for federal tax purposes. State and local income tax rates vary from 1% to 16% of taxable income. Some state and local income tax rates are flat (single rate) and some are graduated. State and local definitions of what income is taxable vary highly. Some states incorporate the federal definitions by reference. Taxable income is defined separately and differently for individuals and corporations in some jurisdictions. Some states impose alternative or additional taxes based on a second measure of income or capital.

States and localities tend to tax all income of residents. States and localities only tax nonresidents on income allocated or apportioned to the jurisdiction. Generally, nonresident individuals are taxed on wages earned in the state based on the portion of days worked in the state. Many states require partnerships to pay tax for nonresident partners.

Tax returns are filed separately for states and localities imposing income tax, and may be due on dates that differ from federal due dates. Some states permit related corporations to file combined or consolidated returns. Most states and localities imposing income tax require estimated payments where tax exceeds certain thresholds, and require withholding tax on payment of wages.

Puerto Rico is treated as a separate taxing entity from the USA; its income tax rates are set independently, and only some residents there pay federal income taxes (though everyone must pay all other federal taxes). The unincorporated territories Guam, American Samoa, and the Virgin Islands also impose income tax separately, under a "mirror" tax law based on federal income tax law.