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Federal Income Tax vs. State Income Tax (With Examples)

Contents1 Federal Income Tax Vs. State Income Tax Explained2

Federal Income Tax Vs. State Income Tax Explained

The U.S. runs a multilevel tax system under which the federal, state, and sometimes local governments impose taxes. There is a similarity in the imposing tax system between state and federal income taxes; they charge a percentage rate to taxable income.

Yet, state and federal income tax rules can vary significantly in terms of tax rates and how they are applied and the kind of taxable income and the deductions, and the tax credits allowed.


  • The national government and many states impose income taxes, yet their laws can vary from state to state. 
  • Federal taxes are radical, and the higher the income is, the higher the tax rates are. 
  • Few states also have a progressive tax system, but other states charge an equal tax rate on all incomes.

State Income Taxes

Income taxes of states could vary from state to state. Alaska, Florida, Tennessee, Texas, South Dakota, Nevada, Washington, and Wyoming do not have income taxes. Only income and dividends attract the New Hemisphere. 

Each state has either a progressive or flat income tax system. A flat tax system charges an equal rate to all the incomes. As of 2021, eight states prefer this method: Colorado (4.55%), Indiana (3.23%), Kentucky (5%), Massachusetts (5%), Michigan (4.25%), North Carolina (5.25%), Pennsylvania (3,07%) and Utah (4.95%).

The majority of states charge income taxes, even though they use progressive tax systems, where more significant income is taxed accordingly. This is the situation in the federal tax system. Few states fix their marginal tax brackets for this cause on the federal tax code, yet many states carry out their own. Some of them modify their brackets yearly to coordinate with inflation, just like the federal government.

Twelve tax brackets are there in Hawaii in 2021, but Kansan has just three. The state whose progressive tax system stands on the top in California’s top tax rates (13.3%) applies to unmarried people with incomes over $1 million and married ones with incomes over $1,181484. North Dakota, at 2.9% using married or unmarried people with a gain of Over $433,200 – has the least top marginal tax rate.

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Federal Income Tax

The United States Internal Revenue Code that elaborates the federal income tax laws went through some substantial modifications in 2018 under the Tax Cuts and Jobs Act (TCJA). There are currently seven marginal tax brackets : 10%, 12%, 22%, 24%, 32%, 35% and 37%.

In the tax year of 2020, the highest rate was 37% at $51841 in the taxable income for unmarried and $628,301 for marrieds. In the 2021 tax year, the highest rate will be 37% at $523,601 for unmarried and $628301 for marrieds.

Specific Deliberations

The taxpayers can affirm either a conventional deduction or itemize their deductions within the federal tax system. The traditional deductions hikes in 2018 under the Tax Cuts and Jobs Act, resulting in more benefits to the taxpayers opting for standard deductions. 

In the 2020 tax year, the standard deduction was $12,400 for unmarried taxpayers and unmarried tax-payers filing separately, and for married and for the head of households, it was $18,650. For marrieds filing jointly, it was $24,000.

In the tax year 2021, the standard deductions hiked to $12,550 for singles and married taxpayers filing separately and $18,800 for the heads of the households, and for the married taxpayers filing jointly, it is $25,100.

As stated above, the federal and state governments vary in terms of incomes they impose a tax. The deductions and credits they permit, for example, pension and social security income, are taxable under federal laws that individual states allow exemption in taxation.

The state income tax is exempted on the revenue generated from the U.S. Treasury securities that consist of saving bonds, but the federal government imposes a tax.

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Federal Income Tax vs. State Income Tax Examples

Suppose an unmarried taxpayer Jacob, is living in New Hampshire, reports about his taxable revenue i.e. $75,000 per annum adding on the interest income of $3,000 on his federal tax return. New Hampshire exempts $2,400 on the interests and dividend tax; the due tax is only $600 of the interest and dividends income.

The taxpayer would only pay $30 as the state tax as there is no tax on the earned income in New Hampshire, but it does impose a tax on the revenue from the tax investment over the exemption amount @5%.

If Jacob lived in Utah, he was obligated to pay a 4.95% flat-rate tax on his earned and unearned income. If his tax bill is $3,862, under the progressive system in 2021, he is obligated to pay $955 on his first earned $9,950 (falling under the 10% category). He is supposed to pay 12% if he makes between $9,950 – $40,526 and 22% on the revenue of more than $40,526. His effective federal tax rate would be 16.3%. This is how the Federal Income Tax system works.


Through this article’s medium, we hope we abolished your confusion between the federal income tax system and the state income tax system. Understanding both is quite challenging for some people; we tried to keep this article as simple as possible.

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By : June 26, 2024
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