The tax word “conformant”, or more commonly “nonconformant”, is what makes state income taxes so complicated. Every state has its own ability to adopt, or not adopt, changes in federal income tax code, as well as to develop its own taxation strategies. Some states tend to adopt IRS code changes, but they may lag behind at different rates and becoming conformant can take years.

Most people know about whether their state charges income tax, or not, and that status may highly influence where people choose to live. For example, Florida doesn’t collect state income taxes, nor does Texas, where as Minnesota collects the highest marginal tax bracket rate in the Midwest, and New York and California are infamous for their tax rates.

But every state has to collect revenue to make any state-funded undertakings occur. While a state may collect more or less revenue, even if they don’t collect an income tax they have to make up for it somehow. Maybe it’s by having higher property taxes, or higher estate or inheritance taxes.

Tax Foundation has a number of great tax maps on a variety of topics, I encourage you to explore them.

Within state income tax, there’s a number of differences by state. People might think about how their Social Security is taxed, but that is typically where they stop. Unfortunately, there are a number of additional tax traps that certain states employ.

529’s

As of the Tax Cuts and Jobs Act of 2017, funds in a 529 plan are eligible for federally favorable tax treatment, in the form of tax-free growth and tax-free withdrawal for eligible higher education expenses, they are eligible for those benefits for K-12 tuition. And some states offer state tax benefits for contributing to their own or any 529 plan, although they may have penalties for “washing” of funds in and out within the same year. But other states have decided that they do not consider K-12 tuition an eligible reason for 529 withdrawals. Those states hit taxpayers using them this way with taxes, and in some cases penalties to make up for the state tax benefits received for contributing to the 529 in the first place.

HSA’s

HSA’s are a favorite tax-advantaged bucket for many people, especially those for whom a high deductible health plan makes sense. HSA’s are , and in most parts of the country, free from state income tax as well. But there are two states that tax HSA contributions as well as their interest and capital gains (so in, growth, and withdrawal, just like a taxable account). And two other states tax the interest and dividends from HSAs, at least above a certain threshold.

AMT

Alternative Minimum Tax can be one of the most complicated parts of dealing with taxes. Originally created in order to prevent “too many” deductions in high earning households, AMT exists at both the federal level, and for 5 states, at the state level. When dealing with AMT, both the “normal” and AMT calculation must be performed, and the taxpayer is responsible for paying the larger of the two numbers. In those states with federal and state AMT, that’s 4 tax formulas to be managed.

Summary table

Here’s how these three types of tax traps line up. Is your state on this list?

These are only some of the variations in tax structure between states. Others provide exclusions of some amount of pension or annuity income, some have healthcare mandates, some have college tuition credits, the list goes on and on. If you are considering living or working in a new place, take some time to learn about all of the tax implications of that change. Because while we don’t want the tax tail to wag the dog of living your life, this is one of those scenarios where a pinch of prevention can be worth a pound of cure.