As the millions of Americans moving from one state to another in 2020 either have learned or soon will discover, tax laws vary significantly from state to state. Thirty states and the District of Columbia use income scales to define their graduating tax brackets — the more you make, the more of your income you pay in tax.
California has the highest top income tax rate: Individuals making $1,000,000 pay more than 13% (the cap is almost double for people who file jointly). North Dakota, by contrast, has the lowest: People making $400,000 or more pay just shy of 3%.
The average number of tax brackets in the U.S. is six, but the range is wide, from a high of 12 individual brackets in Hawaii to a minimum of three in Alabama, Arkansas, Kansas, Louisiana, Maine, Mississippi, and Rhode Island.
The map below shows the tax rates for the top earners in each state and the District of Columbia.
There are flat income tax rates in 9 states — Colorado, Illinois, Indiana, Kentucky, Massachusetts, Michigan, North Carolina, Pennsylvania, and Utah — meaning that regardless of how much you make, you'll pay the same rate.
Meanwhile, seven states — Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming — have no individual income tax at all, and two — New Hampshire and Tennessee — only tax income from dividends and interest.
There's a catch on that last point, however: Tennessee has been gradually winding down its individual income tax, and this will be the last filing year when residents of the Volunteer State will pay taxes on their dividends or earned interest. As of January, Tennessee's income tax is no more.
It's confusing, but it can still be manageable. Here are some tips for filing your taxes this year.
If you made less than $72,000 in 2020, you can use the IRS Free File program to prepare and submit your federal return at no charge. The software may also set you up with low-cost or even no cost ways to submit your state returns.
The offers you get from partner companies will likely vary based on your income, as well as factors including your age and state of residence. Eligibility tends to focus on people with straightforward returns, meaning they have W-2 income, limited investment income, and are claiming the standard deduction.
If you don't qualify for Free File, there are other options you might explore for free tax prep, including volunteer assistance programs and free versions of tax prep software.
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In January, the IRS delayed the start of tax season by about two weeks "to do additional programming and testing" following the second stimulus package that Congress passed at the end of December. That means you'll have a shorter window to file your taxes, as the Treasury Department is unlikely to extend the traditional April 15 deadline as it did last year.
Here are three reasons you should file sooner rather than later during this year's truncated tax season:
- The earlier you file, the sooner you get your money. A lot may have changed from last year to this one, but this axiom still holds true: "The sooner you file, the sooner you'll be eligible to receive your refund," Jeffrey Levine, chief planning officer at Buckingham Wealth Partners in Garden City, New York, told Grow recently. "That's money in your pocket sooner rather than later."
- Claim your missing stimulus money. Your refund might not be the only money you're claiming from the IRS this year: Your 2020 tax return is the place to address any Covid stimulus payments you didn't receive, whether that's because your prepaid debit card was sent to an old address or you simply didn't qualify for the full stimulus amount.
- Keep yourself out of the backlog. When the pandemic sent much of the federal workforce home, it sent with it myriad delays for agencies who have to interact with the public. In the case of the IRS, that meant massive backlogs in its processing of mail and paper filings, some of which the agency is still digging out from under. By late January, the IRS still had a backlog of 6.7 million 1040 tax return forms to process, Politico reported. By filing early and electronically, you'll keep your records (and your refund) out of that mess.
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