Your State Income Tax Return: 3 Things You Should Know

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Getting your federal tax return off to the IRS by April 15 is hard enough for most Americans. But for those who live in the 43 states that charge at least some form of state income tax, getting your 1040 finished is just half the battle. To complete the job, you need to get your state return completed -- and that can involve an entirely different set of challenges.

To help you navigate the ins and outs of your state income tax return, we've put together a few must-know aspects to make sure you don't make any obvious mistakes. As tempting as it can be to take some shortcuts, you can't afford to make incorrect assumptions about how your state income tax laws work. Let's take a look at three things you should know about your state income tax return.

1. Your State Might Have Different Tax Rules Than the Federal Government. If you were putting together a tax system for a state, the simplest thing to do would be to take the numbers from your federal return and use them to calculate your state income tax. In fact, for a long time, some states did exactly that, imposing a fixed percentage of your federal tax bill as the state tax.

Unfortunately, most states have different definitions of what qualifies as taxable income, as well as what deductions, credits and other tax breaks are available. Even things as simple as the standard deduction can differ from state to state, and some states will have flat tax rates while others have several brackets similar to the federal system.

Because of the differences between the state and federal systems, you need to give yourself enough time to treat your state return as a brand-new exercise. If you think that your federal return will get you most of the way toward completing your state tax return as well, you're probably in for a nasty shock.

2. You Might Have to File More Than One State Tax Return. The nice thing about the federal tax return is that you only have to file one each year. But in many cases, you might have to file multiple state tax returns.

For example, if you moved during the year, you'll likely have to file part-year returns in both of the states you lived in, allocating your income between the two states and paying tax to both. In addition, if you live close enough to a state border that you work and earn income in a different state from where you live, then the state where you work will typically require you to file a return covering your work income, while the state where you live will tax all your income but give you a credit for what you paid the state where your job is located. Some neighboring states have reciprocal agreements that simplify tax preparation, but if you're not one of those fortunate people who benefit from such agreements, you might well end up facing extra work come tax time.

3. If You Need an Extension, Make Sure You File With Your State If Necessary. It's easy to get an extension of time to file your federal tax return. Simply by making a request either electronically or on a paper extension form, you can get six months of extra time to finish your return and send it to the IRS.

Again, the simplest way for states to handle extensions would be to have your federal extension automatically apply to your state return as well. Unfortunately, state and federal government agencies aren't well enough connected to handle that kind of situation, and so you'll typically have to file a separate extension request with your state. The good news, though, is that most states are almost as generous in granting extensions as the IRS is. Just be sure to pay enough of your outstanding tax liability with your extension request to avoid any interest and penalties from having to file later than the original deadline.

State tax returns can be an added pain in the neck for taxpayers if you're not prepared. By being aware of some of the traps for the unwary, you can make sure you don't make mistakes that will create problems with your state tax return.

Motley Fool contributor Dan Caplinger surprised himself when he moved from a state that didn't have income taxes to one that did. You can follow him on Twitter @DanCaplinger or on Google Plus. Check out our free report on one great stock to buy for 2015 and beyond.
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