State and Federal Taxes
Let’s start with the basics. The U.S. tax system is bifurcated into state and federal taxes. “But what’s the primary difference between the two?” you might ask. In essence, federal taxes are levied by the national government, and they’re used to fund a variety of nationwide initiatives such as defense, foreign affairs, social services, and more.
State taxes, on the other hand, are imposed by each individual state to fund state-specific needs like infrastructure, public schools, and local public services. The kinds of taxes and the rates at which they’re applied can vary dramatically from one state to another.
Authority and Tax Rates
At the federal level, tax rates are determined by Congress and are applicable across the entire nation. For state taxes, it’s the state legislature that decides the rates, which is why there’s such variability from one state to another.
Federal tax rates are progressive, which means they increase as your income does. You’ll fall into different brackets depending on your income level, with rates ranging from 10% to 37%.
Let’s break down the federal tax rates first. As of the current time of writing, the federal income tax rates are as follows:
- 10% on income up to $11,000 for individuals, up to $22,000 for married couples filing jointly
- 12% on income over $11,000, $22,000 for married couples filing jointly
- 22% on income over $44,725, $89,450 for married couples filing jointly
- 24% on income over $95,375, $190,750 for married couples filing jointly
- 32% on income over $182,100, $364,200 for married couples filing jointly
- 35% on income over $231,250, $462,500 for married couples filing jointly
- 37% on income over $578,125 for individuals, $693,750 for married couples filing jointly
On the state side, the structure is less uniform. Some states also use a progressive system, while others implement a flat tax rate. And interestingly enough, there are even a few states with no income tax at all.
Income Tax: State vs. Federal
Federal income taxes, collected by the Internal Revenue Service (IRS), fund federal programs, initiatives, and services ranging from national defense to social security and healthcare programs. These taxes impact your income at the national level and apply to all U.S. citizens and residents, regardless of the state in which you reside or work.
On the other hand, state income taxes support state-funded programs and initiatives like public education, transportation infrastructure, and public safety services. The impact of state taxes on your income, however, can differ significantly from state to state as each has its own set of tax laws.
And then you might wonder, “Do federal and state taxes cover the same types of income?” Generally, both federal and state taxes apply to most types of earned income like wages and salaries, as well as unearned income like interest and dividends. However, there can be exceptions depending on the specific state tax laws.
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Tax-Free States and their Implications
Some U.S. states, like Texas, Florida, and Nevada, among others, do not levy a state income tax. While that might seem like a dream come true, keep in mind that these states often have other types of taxes, like sales and property taxes, that may be higher than states with an income tax.
“But can I owe state taxes but not federal taxes, or vice versa?” This is a valid question. In some instances, yes. For example, if you live in a state with an income tax but your income is low enough to fall below the federal income tax threshold, you could owe state taxes but not federal taxes.
Deciphering the implications of state and federal taxes can indeed be complex. This is where a tax professional can be worth their weight in gold. Their expertise can help guide you through the U.S. tax laws and obligations to ensure you stay compliant and make the most of potential tax savings.
Deductions and Exemptions
An often-asked question is, “Can I claim the same deductions on state and federal taxes?” The short answer is, It depends.
Federal tax deductions, as defined by the IRS, are consistent for all taxpayers in the U.S., regardless of their state of residence. Common federal deductions include those for mortgage interest, student loan interest, and contributions to qualifying retirement accounts, among others.
However, state tax deductions can be a different story. Each state sets its own tax laws, which means that a deduction allowed on your federal tax return may or may not be allowed on your state tax return. Some states offer unique deductions not available at the federal level, while others have fewer allowable deductions.
This brings us to the differences in state and federal tax laws. Yes, they can be quite different, which makes it vital to understand both sets of laws to ensure you’re not leaving money on the table—or worse, underpaying your taxes.
Do I File My State and Federal Taxes Separately?
The short answer, yes. Federal tax returns go to the IRS, and state tax returns go to your state’s revenue or taxation department.
Another common question is, “Do I need to file a state tax return if I file a federal tax return?” The answer depends on several factors, including your state of residence, your income level, and your filing status. In most states, if you’re required to file a federal tax return, you’ll also need to file a state tax return. However, if you live in a state without an income tax, you won’t need to file a state tax return—though you’ll still need to file at the federal level.
Payment and Refunds
Federal taxes can be paid online, by phone, or by mail through various IRS-approved methods such as Direct Pay, EFTPS, or a credit or debit card. There’s even an option to pay in cash at a retail partner location.
For state taxes, each state has its own system. Some have online payment options, while others may require mailing a check. Be sure to check your state’s tax website for accurate information.
But what if you overpay? Can you get a refund for overpaid state or federal taxes? Absolutely.
If you’ve paid more in taxes than you owe, both the IRS and state tax agencies will issue you a refund for the difference. This usually occurs when too much tax has been withheld from your paycheck, or you’ve made larger estimated tax payments than necessary.
The information provided herein is for general informational purposes only and should not be considered professional advice. While we aim to provide helpful and accurate information, we make no warranties or guarantees about the accuracy, completeness, or adequacy of the information contained here or linked to from this material.
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