Today, Optima Tax Relief’s Lead Tax Attorney, Phil Hwang, discusses state taxes and collections, including how they differ from federal taxes and collections.
State tax collections and federal tax collections are two distinct systems of revenue collection within the United States. Here are some key differences between them.
Authority and Jurisdiction
States have the authority to collect taxes within their own jurisdiction. Each state can set its tax rates and determine what types of taxes it levies. These can include income taxes, sales taxes, property taxes, excise taxes, and others. The federal government collects taxes nationwide and has authority over issues that affect the entire country, such as income taxes, corporate taxes, Medicare taxes, and more.
Tax Rates and Structures
States have the flexibility to set their own tax rates and structures, which can vary significantly between states. Some states may have high income taxes but no sales tax, while others may have the opposite. Federal tax rates, on the other hand, are determined by the U.S. government and are the same across the entire country, with variations based on income levels and filing status.
Use of Revenue
The revenue collected by states is primarily used to fund state-specific programs and services, such as education, healthcare, infrastructure, and public safety. Each state decides how it allocates its revenue. Federal tax revenue is used to fund programs and services that benefit the entire nation, such as defense, social security, healthcare (e.g., Medicare and Medicaid), infrastructure projects, and federal agencies’ operations.
Collections, Enforcement, and Audits
State revenue agencies or departments, such as the Department of Revenue, are responsible for collecting state taxes. In addition, state tax authorities enforce and audit state tax compliance. Penalties for non-compliance vary by state. For example, if you owe more than $100,000 in the state of California, the state can have your business license or driver’s license suspended, as well as cease any operations they have with your business.
At the federal level, collections are done by the Internal Revenue Service (IRS). The IRS is responsible for enforcing federal tax laws and conducting audits for federal tax returns. Federal penalties can apply for non-compliance with federal tax laws.
Don’t miss next week’s episode where Phil will discuss IRS online accounts. See you next Friday!
Every year like clockwork you conscientiously pay your state income taxes, but this year you spaced and missed the deadline. Don’t panic. Unless you neglect to file AND pay for years, it is unlikely that you’ll wind up as an extra for Netflix’s Orange Is the New Black. But you’ll need to get your act together now to minimize the potential damage.
Are You Sure You Have to File?
If you live and work in any of the following states, you are not required to file an income tax return or pay state income taxes: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. Two more states, New Hampshire and Tennessee, also exempt wage earners from paying state income taxes, although interest and dividend income is taxed. But if you live or work in any of the other 41 states or in the District of Columbia, you may be subject to late filing fees, late payment fees or both. (PriorTax)
How to Get a State Tax Extension
Your state’s official website is likely to have information available on filing state tax returns after the deadline. If you cannot find the information online, contact your state’s treasury or tax office by telephone. Be prepared to answer general questions about your income and filing status, because your answers may have a bearing whether you actually must file. For instance, many states exempt taxpayers who owe no state taxes from the requirement of filing a return. But you will forfeit any refund or tax credits you might otherwise have received if you do not file a return.
Were You Granted an Automatic Extension?
Some states grant taxpayers an automatic extension of time to file if they filed an extension request with the IRS on or before the tax deadline. Other states require a separate extension request even if you filed a federal request. Again, consult your state’s official website or place a telephone call to the appropriate agency to obtain the information that you need.
State Tax Amnesty Programs
Like the IRS, many states have adopted a cooperative attitude toward taxpayers who make honest mistakes. Some states have tax amnesty programs or otherwise eliminate or minimize penalties for taxpayers in arrears who voluntarily come forward. If you just straight up forgot to file, or didn’t file because you didn’t have the money, come clean with the proper authorities. Often, the state will work with you to develop a payment schedule that you can live with to bring you back into compliance.
What Do I Do Now If I Forgot to File State Taxes?
File your state taxes ASAP. If you forget to file your return until a few weeks or even a few months after the deadline, don’t panic. There is only the slimmest chance that you will ever face criminal charges. But that doesn’t mean that you should dawdle. Tax penalties imposed by the state can often rival those of the IRS, including liens and levies against your paycheck and assets or even possible jail time. The sooner you file, the quicker you can stop the clock on penalties and interest charges.
If you are missing Form W-2 or other tax records that you need to file a return, you can often obtain the information you need immediately through the IRS website. In some cases, you may need to make a request by telephone or regular mail, which will require extra processing time. Inquire with your secretary of state’s office or tax office if you need blank tax forms. Don’t just assume that you can file the same form as you would have if you had filed your return on time.
Don’t Assume You’re in the Clear
Honest taxpayers act as quickly as possible to file their returns after they have realized that they somehow forgot to do so. But some may decide that since they have managed to get away with not filing a return or paying taxes that they will continue to flout the law. Don’t make that mistake. If your state income tax authority concludes that you intentionally evaded paying taxes, you could have the book thrown at you – including time behind bars.