LA officials consider new half-cent tax to offset loss of federal dollars
The Los Angeles County Board of Supervisors is considering raising the sales tax by half a cent in response to significant federal funding cuts.
Americans generally fear the IRS enough to make sure to file their federal taxes, but most people also have to remember to pay their state taxes.
There are exceptions. Taxpayers living in Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming need not worry. This is because these states do not impose personal income taxes. So does everyone else.
Still, I feel a little relieved. According to the nonprofit Tax Foundation, nine states will lower their income tax rates starting in 2025, meaning more money will stay in your pocket.
But state tax filers need to be even more careful than usual, as many states are not complying with new federal provisions in a major tax and spending bill that President Donald Trump signed into law on July 4.
Americans living in non-compliant states may lose access to new tax breaks on their state returns, including an additional senior citizen deduction and tax exemptions on overtime and tips retroactive to 2025. They may have to add that income when calculating their debt to the state.
Which states will lower their income tax rates in 2025?
Which states are not compliant with federal tax law?
These states do not follow all of the new federal tax laws.
- California: Trump’s account is not recognized as a tax-deferred retirement account. This means that income is taxed annually to the child in California and growth is not deferred until distribution and child tax rules apply. Additionally, employer contributions are taxable income in California. Only the first $1,000 given by the government to seed the account is excluded from state revenue.
- Colorado: Refusal to exempt overtime pay from tax. The plan is to add an “excess federal deduction for overtime pay” section to the state tax return. Taxpayers must report the amount withheld to the federal government and add it back for state purposes.
- new york: Continue to tax tips and overtime pay by adding new codes to the IT-225 form: “Add Exempt Tip Income” and “Add Exempt Overtime Pay.”
- Illinois: It does not introduce a tax exemption for overtime pay or tips, and would likely update Schedule M to require federally exempt tips and overtime pay to be added to income.
- maine: Denied bonus senior deductions and deductions for car loan interest, tips, and overtime pay.
Note: The Washington, D.C., City Council passed an emergency bill late last year that carved out parts of the tax code from recent federal tax changes, including a new senior citizen tax deduction and a tip exemption. However, Congress voted to reject the bill on February 12, which would make Washington’s tax code compliant with federal tax law.
The district has not yet commented on how it will handle such a major switch in the middle of tax season, but D.C. Chief Financial Officer Glenn Lee warned in a letter to Congress that the district “will need to pause the current filing season” to update its tax forms and guidelines, a process that will take several months.
Who must file a state tax return?
If your state has income taxes, there are two scenarios in which you may need to file a return.
- you are a resident of the state
- You are not a resident of that state, but you earn income in that state. Examples of this include rental income from vacation homes and professional athletes and consultants working in different states. You must file a tax return and pay taxes on the income in every state in which you earn income. You must also report that income on your home state tax return, but your home state typically allows you to deduct taxes paid to another state on the same income.
Will the state conduct a tax audit?
yes.
“States are similar to the IRS and have mechanisms to audit taxpayers,” said Ken Rios, tax director at accounting and advisory firm Kaufman Rossin.
Each state has different rules, so it’s important to know what the rules are in the state where you’re filing. Experts say misreported data, mathematical errors, incomplete state tax forms, excessive deductions, and failure to file state tax returns at all or on time are common audit triggers.
State audits work similarly to IRS audits. Typically, the state will contact you via email notifying you of the audit and asking for more information with instructions on how to proceed.
Does a state audit automatically mean an IRS audit?
That’s not necessarily the case, but it’s possible because your state’s tax office is likely communicating with the IRS and some of the information on both returns is the same.
When is state tax due?
Most states typically follow federal guidelines by April 15th. However, you should double-check with your state, as it may vary for various reasons, such as disasters.
If your state has no income tax, there is no deadline.
Medora Lee is USA TODAY’s money, markets and personal finance reporter. Please contact mjlee@usatoday.com. Subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday through Friday morning.
