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The IRS isn't the only agency with its hand out collecting income taxes—most U.S. states collect income taxes from their residents as well. Every taxing authority, including the IRS as well as your state government and local government (if they levy income taxes) has its own set of tax rates and rules. There are a number of differences between state and federal income taxes. Here are the basics on both.
What Is the Difference Between Federal and State Income Taxes?
The main difference between federal and state income taxes is that federal taxes fund the federal government and state taxes fund the government in your state. All U.S. taxpayers process their federal income taxes through the IRS, but each state has its own taxing authority. For example, in California, the Franchise Tax Board oversees state income taxes; in New York, it's the Department of Taxation and Finance.
If you live in one of the 42 U.S. states that collect state income taxes, you may already be aware that state taxes are being withheld from your paycheck alongside federal income tax. Although filing deadlines and procedures can vary, typically you'll file state income taxes once a year when you file your federal taxes to report your income, claim deductions and credits, and either pay the taxes you owe or receive a refund.
How Does Federal Income Tax Work?
The IRS oversees federal income taxes, which are calculated using a progressive system of marginal tax rates and brackets. In plain English, this means your income is taxed at progressively higher rates as it increases. We'll walk through the math in a moment: For now, here are the tax rates and brackets for the 2023 tax year.
|2023 Marginal Tax Rates and Tax Brackets|
|Single||Head of Household||Married Filing Jointly||Married Filing Separately|
|10%||$0 - $11,000||$0 - $15,700||$0 - $22,000||$0 - $11,000|
|12%||$11,001 - $44,725||$15,701 - $59,850||$22,001 - $89,450||$11,001 - $44,725|
|22%||$44,726 - $95,375||$59,851 - $95,350||$89,451 - $190,750||$44,726 - $95,375|
|24%||$95,376 - $182,100||$95,351 - $182,100||$190,751 - $364,200||$95,376 - $182,100|
|32%||$182,101 - $231,250||$182,101 - $231,250||$364,201 - $462,500||$182,101 - $231,250|
|35%||$231,251 - $578,125||$231,251 - $578,100||$462,501 - $693,750||$231,251 - $346,875|
|37%||$578,126 or more||$578,100 or more||$693,751 or more||$346,876 or more|
Do Federal Income Taxes Differ by State?
Although your state income tax bill may vary depending on which state you live in, federal income tax rates and rules are the same in every state.
How Does State Income Tax Work?
State income taxes operate on many of the same principles as federal income taxes, although tax rates, available deductions and credits, and filing schedules may vary. States also vary in terms of how they apply income taxes. Some states use a progressive tax system with tax brackets and marginal tax rates, like the one the IRS uses. Other states rely on a flat tax that applies a single tax rate to all taxable income.
Which States Have No Income Tax?
Eight U.S. states currently have no personal income taxes. They are:
- South Dakota
Additionally, New Hampshire is phasing out its personal income taxes. Currently, New Hampshire taxes interest and dividend income only, not wages. These taxes are being phased out starting in 2023 and will be gone by 2027, eventually adding a ninth state to this list.
State vs. Federal Income Tax Example
To see how state and federal taxes apply, let's do some quick math for a married couple filing jointly and living in Colorado. Here's how their federal and state income taxes might look with $112,000 in taxable income:
Marginal Tax Rates Apply for Federal Taxes
Using the marginal tax rates and brackets for 2023, shown above, federal taxes on $112,000 would look something like this:
|The first $22,000 ($0 to $22,000) is taxed at 10%||=||$2,200|
|The next $67,449 ($22,001 to $89,450) is taxed at 12%||=||$8,094|
|The remaining $22,549 ($89,451 to $112,000) is taxed at 22%||=||$4,961|
|Total federal tax owed||=||$15,255|
State Income Tax in Colorado Is Flat
Colorado taxpayers pay a flat 4.4% income tax. In practice, Colorado taxpayers make a series of adjustments to the taxable income shown on their federal tax return, including adding back state taxes they've deducted and subtracting allowable state tax deductions and credits. For simplicity's sake, let's say our hypothetical couple's income stays constant at $112,000.
$112,000 × 4.4% = $4,928
With $112,000 in taxable income, a married couple filing jointly would pay roughly $4,928 in Colorado state income tax.
Total Income Tax Liability
Although our numbers are only estimates, our hypothetical couple could expect to pay about $20,183 in state and federal income taxes. Their combined effective tax rate (state and federal) is $20,183 divided by their taxable income of $112,000, or 18%. State income taxes would be due on the same date as federal taxes.
Again, state income taxes may work differently in your state. Many states use a progressive tax system like the U.S. government's to calculate state income taxes. Other states don't require you to file state income taxes at all. Check with your state's taxing authority for details.
The Bottom Line
Filing both state and federal tax returns can double the fun of doing your taxes: two sets of rules, two sets of calculations and—if doing your taxes is not your favorite activity—double the anxiety over potentially making a mistake. On the upside, both state and federal tax returns generally rely on the same sets of information (your W-2 and 1099 forms, for example), so doing both returns at the same time allows you to get your taxes over with at once.
If doing your state and federal taxes feels stressful, consider working with a tax professional who can help you complete your returns and file your taxes with confidence. Alternatively, tax preparation software typically includes both state and federal returns, so you can complete both with a little automated help.