State Income Tax Vs. Federal Income Tax: What’s the Difference?

Income Tax

Unlike many countries, the U.S has two main types of taxes – federal taxes that are standardized for all income-earning citizens, and income tax that vary depending on the state. Federal taxes work on a progressive model, meaning that the more that someone earns, the larger percentage of their income is taxed. Some states take a similar approach, but others use a flat taxation model.

State Taxes

The amount of tax you can expect to pay will vary significantly depending on where you live, with each state taking its own approach. Several states have no income tax, including Florida, Nevada, Texas, Washington, Alaska, and Wyoming. Other conditions such as Tennessee and New Hampshire only take taxes on dividends or money made through interest and don’t tax on wages. Read more about PM Kisan for more information on PM Kisan Samman Nidhi Scheme.

Outside of the states above, the rest tax residents on either a flat or progressive model. Flat taxation takes a percentage of money earned on dividends, wages, and interest and taxes based on this, regardless of the amount earned. As of 2021, eight states use this approach, which includes Colorado, Indiana, Kentucky, Massachusetts, Michigan, North Carolina, Pennsylvania, and Utah. The flat income tax level varies from 3.07% for Pennsylvania up to 5.25% for North Carolina.

A progressive taxation model is used for the remaining and most states, where the percentage of income taxed increases depending on the amount earned. Federal taxes use the same model, like many other countries, as it’s a ‘fairer’ way of taxing a population. The flat taxation model used in other states means that those on a lower income pay a more significant proportion of their total income, putting a higher strain on this population. Each state has a slightly different approach, with some following the same brackets as federal taxes and others using their brackets. For example, Kansas has only three brackets of taxation, while California has 12, with the highest bracket taxing those earning over $1 million at a rate of 13.3%.

Federal Tax

As mentioned, federal income tax uses the progressive model with seven brackets, each increasing the deducted percentage of income. As individuals move through the brackets, they only pay tax at the amount in that bracket, rather than a flat rate in an upper bracket. The tax brackets are as follows – 10%, 12%, 22%, 24%, 32%, 35%, 37%, with the top level of interest beginning when an individual earns over $523,601. The Taxlyfe tax calculator is a simple way to understand what bracket of tax you fall into, and how much federal income you can expect to pay each year.

Federal taxes allow for deductions in how much income tax you pay, and after 2018, the number of standard deductions increased significantly. In 2020, single taxpayers can take a standard deduction of $12,400, which can be taken home tax-free.
An example to show how state taxes can impact the amount you’ll see in your bank account at the end of the year takes someone who earns $75,000 through wages and $3000 in interest. In New Hampshire, the first $2400 of interest is exempt from tax, so only $600 will be taxable, and wages aren’t taxed at all. There’s a flat tax on all interest of 4.95% in Utah, meaning that a total of $3861 will be deducted for tax, compared to $30 in New Hampshire.

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