What Is State Income Tax - Overview, How It Works And More

State income tax is a tax charged by a state on the income of its residents and non-residents who earn income within or from that state. Taxpayers are responsible for filing their own state tax returns in each state where they earn income, and it exceeds the state's filing limit. However, not every state imposes a state tax, and as of 2026, nine states do not levy an income tax. Keep reading further to know the names of these 9 states and which state imposes the highest income tax.

What is State Income Tax?

State income tax is a tax that is charged by a state on money earned within or from that state. Taxpayers need to file their own state tax returns just like federal tax returns. However, not all states impose income tax, and some may rely on other revenue sources.

That being said, let's see Which U.S. states don't impose income tax.

How State Income Taxes Work and States With No Income Tax?

The specific requirements of state tax laws can vary significantly from state to state, including rates, procedures, and forms. Similarly, the filing deadlines may also vary. However, for individuals, the deadline for filing state tax is the same as the federal tax day, which is usually April 15.

Taxpayers must file returns in each state where they earn income that exceeds the state's filing limit. To determine income and deductions, many states follow federal rules. Along with your state return, some states may even request a copy of your federal tax return.

Now, if we talk about states with no income tax, as of 2026, there are 9 states that do not impose an income tax. These states are Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Wyoming, and Washington.

Moreover, starting from 1st January, 2025, New Hampshire abolished its interest and dividends tax officially. It means taxpayers are not required to pay tax on unearned income anymore, such as interest and dividends.

Apart from these states, all other states charge state income tax, and Washington, D.C. has a local tax. If taxpayers earn money in a no-income-tax state but taxpayers stay in a state that imposes income tax, then their home state will still tax that income.

States require taxpayers with income that isn't subject to withholding to estimate their taxes and pay them in four quarterly payments. It can include business or self-employment income. Additionally, if taxpayers fail to file and pay their state taxes on time, they can incur penalties and interest.

State income tax doesn't need to be easy to understand. So, moving further, we will discuss some special considerations for state taxes.

Special Considerations for State Taxes

For those earning income in multiple states, understanding state income tax can be complex. Here are some things to keep in mind:

Living and Working in Different States

Most people live and work in one state. However, if you earn income in multiple states, you might need to file returns in all those states unless one is a no-income-tax state.

Confused? Don't worry, let's understand this with the help of an example.

For example, if you live in Jersey City, New Jersey, but work in New York City, Los Angeles, and Chicago, you will need to file taxes in New Jersey, New York, California, and Illinois.

It basically means that your 'tax home' is where you do most of your work, so if you spend most of your time working on Broadway, then New York will be your tax home. The IRS (Internal Revenue Service) considers how much time is spent at each location to determine your main business place.

Moreover, if you work in a state but don't live there, your tax returns will be filed as non-resident or part-year resident.

Some nearby states have agreements to avoid taxing the same income. You may be eligible to claim credits or deductions on your returns if you face double taxation without an agreement. Also, the rules can get even more complicated if you work remotely. Hence, it is advised to consult a tax expert.

**Note: Keep in mind that if you live abroad, you might still have to file state tax returns based on your home state's rules.

This was all about how individual taxpayers are liable for state income tax. Let's now see how businesses face state income tax.

State Income Tax on Businesses

Some states also impose taxes on businesses, including corporations, partnerships, and some trusts and estates. However, the U.S. or foreign corporation needs to have a significant connection in the state to be taxed, which is called a nexus. The requirements for a nexus can vary by state, but generally, it includes earning income, owning property, or having employees in the state.

Which State has the Highest Income Tax?

It depends on how much income is earned. Some states have a flat tax rate, while others have varying tax rates where the rates increase with income. For 2026, California has the highest marginal tax rate at 13.30%, but this rate applies only to income exceeding $1 million. California also has a 1.1% payroll tax, bringing the total rate to 14.4%.

You must be thinking whether your earnings will be subject to double taxation. Let's discuss that.

Will Your Earnings Be Subject to Double Taxation?

No, states can no longer tax the same income, all thanks to the U.S. Supreme Court ruling in Comptroller of the Treasury of Maryland v. Wynne in 2015

However, you will still need to declare your earnings and file returns in each applicable state.

To Conclude

You might owe state taxes where you live or work in addition to federal taxes. You don't need to pay tax in more than one state for the same income, but you must file in every relevant state. Moreover, if you are facing complex tax situations, connect with an expert at Savetaxs.

At Savetaxs, we have a team of experts who can help you ensure that you stay compliant and fulfill all your obligations without overpaying. Our team can help you claim all the applicable deductions and credits and help you throughout the return filing process. Connect with us right away, as our team is actively working 24/7 across all time zones.