4 Ways to Reduce State Income Taxes

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I recently ran across an article that listed my state as one of the top 10 worst states for taxes. I didn’t even have to go verify the information – based on my personal experience, I knew it was true. Each of the past two years here, we have owed state income tax for the first time in our 10 year marriage. I don’t know about you, but it’s a sinking feeling when you owe thousands of dollars in taxes! The article was just what I needed to motivate me to do more research on how to reduce state income taxes. I came up with four ways to get out of that huge tax bill this year.

state income tax

Get a Move On

The first solution to my tax burden is simply to move. OK, so moving states isn’t actually simple, but moving would definitely lower our tax bill. My husband and I previously lived in Tennessee and Texas – both states without an income tax. However, our current state’s income tax is quite high, so we would benefit by moving to any number of states with a lower rate. Here’s a good resource for determining where your state falls in relationship to other state’s income tax rates. To be very thorough about this, I would also want to look into a cost of living comparison – just because taxes are lower in one state doesn’t mean that the overall cost of living is.

Get Paid Less

This sounds counter-intuitive, but stick with me: decreasing my pay can decrease my tax bill. Income diverted to something like a 401(k) is pretax income, which means I have decreased my taxable income. This can be a win-win scenario – I save for retirement and also don’t shell out thousands of dollars in taxes. This isn’t a great option for my family, because we can’t spare too much money for our 401(k) while we are paying huge student loan bills.

Get What You Deserve

Either through your own research or through the use of a good tax professional, you can track down additional deductions or tax credits and use those to reduce your tax burden. Be smart about this – I’ve known people who buy a new truck because it meant getting a tax credit, but they didn’t actually need a new truck. The math doesn’t quite work out on this one; it only makes sense to purchase something if you would have purchased it anyway. Otherwise, you are paying for expensive appliances, vehicles, etc. to get a small tax deduction.

When All Else Fails

When you have tried all the above in order to reduce your state income taxes, consider withholding additional money from your paycheck. While you don’t want to owe a large sum of money at tax season, it’s also best to not get a big refund. Getting a big refund means you haven’t been putting your money to the best use, such as through investing.

In our case, I researched the state tax laws and found that we have few deductions available to us. We have no other choice but to ask for more money to be withheld from our checks. Just a little over 3 months left in the year, so if you need to take action to reduce your state income taxes, the time is now!