Careful With Your State Return

You have your Federal tax return done, but what about your state return? The best way to approach that return is with the same care as you did with your federal return. In some cases, the state makes few changes to the income from the federal while with other states you almost have to do everything over again. So, here are a few things to think about as you prepare your state return.

• Do you have to do a state return? There are several state with no income tax; Alaska, Washington, Nevada, Wyoming, Texas, South Dakota, Florida, Tennessee and New Hampshire. But double check if you live in one of theses state for other “special taxes”. Tennessee and New Hampshire have a form of intangibles.
• Did you take advantage of Bonus Depreciation on your Federal return? Then you might want to check if your state allows the extra deduction or if they modify it.
• Is there special treatement for Capital Gains?
• There are some forms of income that states may choose not to tax. US Government interest generally isn’t taxed on the state level. And look beyond the savings bond you cashed in. A lot of mutual funds are partially invested in US securities and the brokerage statement or accompanying information should tell you what may not be taxable in your state. While we’re talking about interest, tax exempt interest may be taxable in your state or only exempt if the bond meets special criteria. Also, look at retirement income and taxable social security. Some states have special rules concerning pensions and social security.
• How does your state treat your Federal credits and deductions? A lot of states have their own version of the Child Care Credit, Earned Income Credit, or Education Credits. Or they might add special credits on the state tax return or on a separate form. States might also allow a state deduction for contributions to 529 plans and Long Term Care insurance.
• Is it better to itemize deductions on your Federal even if they’re lower than your standard deduction? For most states, you have to itemize deductions on your Federal return to be eligible to itemize on your state return. But because of lower state standard deductions, the few dollars more in Federal taxes may be more than offset on your state tax return. (In Kansas, it could mean the tax on $5000 or more for a MFJ return.)

This post is just to getting you to think about your state return. The best suggestion I can make is to download the line-by-line instructions and read those through to see if you’re missing something. It could save you some money or stop a future “oops” letter. Or see a tax pro. I know I do a couple of state only returns for new clients this time of the year.

 

McIntire Tax Center - on Facebook - on Google+ - or Twitter @ mactax.