Let's begin with the fundamentals. State and national taxes make up the two halves of the American tax system. You could wonder, "But what's the main difference between the two?" Essentially, the national government imposes federal taxes, which are then utilized to finance a range of national programs, including social services, defense, and foreign policy.

State taxes, however, are levied by each state to pay for requirements unique to that state, such as local public services, public schools, and infrastructure. States can differ significantly in the types of taxes they impose and the price points at which they do so.

What Distinguishes State and Federal Income Taxes?

Federal income taxes support the federal government, whereas state income taxes support the government's operations in your state. This is the primary distinction between state and federal income taxes. While every single state has its particular taxation authority, all taxpayers in the United States submit their income taxes to the federal government through the IRS. For instance, the Division of Taxation and Finance is in charge of state income taxes in New York, whereas the Franchise Tax Board, meanwhile, is in charge of California.

You might already know of how state taxes are deducted from your paycheck in addition to federal income tax if you reside in one of the 42 states in the union that levy state income taxes. Generally, when you submit your federal taxes, you'll also file your state income taxes in order to record your income, claim credits and deductions, and either settle for the taxes you are owing or collect a refund. However, filing dates and procedures might differ.

If you live in one of the forty-two countries in the continental United States that impose state income taxes, you may already be aware of how state duties are withheld from the payment you receive in along with federal income tax. In order to track your paychecks, claim advantages and deductions, settle for the revenue taxes you owe, or get a refund, you often file your local income taxes at the same time as your federal taxes. Dates of filing and processes, however, may vary.

Higher households are taxed at an additional rate in states with progressive tax systems. The US income tax system operates on the same framework. While many states use their own, some base their percent brackets of taxation on the federal system of taxation. Some, like the federal government, change their brackets every year to reflect inflation; others do not.

What is Federal Income Tax?

The Revenue Code (IRC) of the United States, which outlines federal income tax regulations, had notable modifications in 2018 with the enactment of the Tax Cut and job act (TCJA). The federal government now has seven marginal tax brackets: 10 percent, 12 percent, 22 percent, 24 percent, 32 percent and 37%.

The highest rate of 37% will take effect for the year 2022, with single taxpayers paying $539,900 and those who are married filing jointly paying $647,850.8. The 37% rate will begin to apply for the 2023 tax year at $578,000 for individuals filing alone and $693,750 for individuals who are married filing jointly.

Example of State vs. Federal Tax on Earnings

Let's perform some fast maths for those who are married filing jointly who live in Colorado to see what the federal and state taxes apply. With $112,000 in earnings that are taxable, the following is how individual federal and state taxes on income may be calculated:

Federal Taxes Are Subject to Marginal Tax Rates

If we were to utilize the rate of taxation and brackets displayed above for 2023, federal taxes of $112,000 would like this:

• Taxes on the first twenty thousand dollars ($0 to $22,000) are 10%, or $2,200.
• Taxes on the remaining $67,449 ($22,001 through $89,450) are 12%, or $8,094.
• Taxed at 22% = $4,961 on the extra $22,549 ($89,451 to $112,000).

Rates of Authority and Taxation

At the level of the government, Congress sets the rates that are applicable to the whole country. The state legislature sets the rates for state taxes, which explains why they vary so much throughout states.

Because federal tax brackets are progressive, they rise in proportion to your income. Depending on how much money you make, you will be placed in one of many brackets, with rates that go from 10% 37%.

First, let's examine the federal tax rates. The federal revenue tax brackets are as follows as of the time of writing:

10% of income for a maximum of $22,000 for spouses filing jointly and up to $11,000 for single people. 12% on salary over $11,000, or $22,000 for jointly filed married couples.

24% on money over $95,375, $190,750, for couples who are married filing jointly; 32% on revenues over $182,100, $364,200; 35% on revenue over $231,250, $462,500, forgot hitched couples filing jointly; 37% on money over $578,125 for people $693,750 for got hitched couples filing jointly.

The structure of the system is less consistent on the state side. While some states employ a flat tax rate, others likewise utilize a progressive approach. It's noteworthy to note that some states do not impose any tax on income at all.

The Final Word!

No matter where you reside throughout the US, government charges are the same. State taxes, however, can vary greatly in terms of their magnitude and underlying principles. While some states have a progressive tax system that taxes high-income people more than others, others have a flat tax.

If you're lucky enough to have an opportunity for employment or are thinking about moving, consider state taxes while evaluating the rates of living in different areas. Keep in mind that sales taxes, property taxes, and other levies can be used by governments to levy money in addition to income taxes.