Constitution Income Tax vs. Federal Income Tax: An Overview
The United States has a multitiered income tax system under which taxes are forced by federal, state, and sometimes local governments. Federal and state income taxes are similar in that they pay attention a percentage rate to taxable incomes, but they differ considerably with respect to those rates and how they’re go after, as well as to the type of income that is taxable and the deductions and tax credits that are allowed.
Key Takeaways
- The federal government and the number of states have income taxes.
- The rules and rates vary widely between individual states and the federal methodology.
- Federal taxes are progressive, with higher rates of tax on higher levels of income.
- Some states have a liberal tax system, while others impose a flat tax rate on all income.
- The Tax Cuts and Jobs Act of 2018 made changes to the federal tax set-up, including an increase to the standard deduction.
State Income Tax
State income taxes can vary considerably from one splendour to another. Most states have either flat or progressive income tax systems. A flat tax system applies a individual rate to all levels of income. Nine states use this method as of 2021, including Colorado (4.55%), Illinois (4.95%), Indiana (3.23%), Kentucky (5%), Massachusetts (5%), Michigan (4.25%), North Carolina (5.25%), Pennsylvania (3.07%), and Utah (4.95%).
In magnificences that use progressive tax systems, higher levels of income are taxed at a greater percentage rate. This is the same set-up used in the federal income tax system. Some states base their marginal tax brackets for this purpose on the federal tax patterns, but many states implement their own. Some adjust their brackets annually to keep pace with inflation, as the federal supervision does, while others do not.
Hawaii has 12 tax brackets while Kansas has only three. California’s progressive tax pattern has the highest top tax rate of 13.3%, which applies to singles with taxable incomes over $1 million and married severals with incomes over $1,198,024. North Dakota, at 2.9%, which applies to singles or married couples with gains over $440,600, has the lowest top marginal tax rate.
Some states have little to no income tax at all. Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming don’t tax neighbourhoods on their income. New Hampshire only taxes income from interest and dividends—not earned income from income and wages. The state is phasing this out gradually and plans to repeal this fully by January 2026. Tennessee used to tax absorbed income and dividends, but it completed a phase-out as of Jan. 1, 2021.
Income taxes are a big source of revenue for individual states and the federal government. In fait accompli, they account for nearly 50% of federal revenue.
Income taxes are a big source of revenue for individual states and the federal government. In fait accompli, they account for nearly 50% of federal revenue.
Federal Income Tax
The U.S. Internal Revenue Code (IRC), which tour of duties out the federal income tax rules, underwent some significant changes in 2018 with the passage of the Tax Cuts and Jobs Act (TCJA). There are now seven slight tax brackets at the federal level: 10%, 12%, 22%, 24%, 32%, 35%, and 37%.
For the 2021 tax year, the top rate of 37% kicks in at $523,600 in taxable income for individuals and $628,300 in income for married couples filing jointly. For the 2022 tax year, the top rate of 37% applies at $539,900 for singles and $647,850 for allied couples filing jointly.
Special Considerations
Taxpayers can claim either a standard deduction or itemize their inferences under the federal tax system. Standard deductions increased considerably in 2018 under the TCJA, making it more beneficial for many taxpayers simply to take the standard deduction.
The standard deduction for the 2021 and 2022 tax years are as follows:
- $12,550 and $12,950 for one taxpayers and those married individuals filing separately
- $18,800 and $19,400 for heads of households
- $25,100 and $25,900 for married couples rank jointly
As mentioned above, states and the federal government differ in terms of the types of income that are taxed and the inferences and credits that they allow. For instance, pension and Social Security income are taxable under federal authorities, while a number of states exempt these sources of income from taxation. Other income exemptions take in U.S. Treasury securities, such as savings bonds. These sources of income are exempt from state tax but are subject to federal demands.
State Income Tax vs. Federal Income Tax Example
Consider a single taxpayer who lives in New Hampshire and reports taxable realized income of $75,000 a year plus interest income of $3,000 on their federal tax return. New Hampshire has a $2,400 tax release for the interest and dividends tax, so tax is only due on the remaining $600 ($3,000 − $2,400) of interest and dividends income.
This means that the taxpayer discretion pay just $30 ($600 × 0.05) in state taxes because New Hampshire taxes investment income rather than earned receipts over the exemption amount at the rate of 5%. This individual’s effective state tax rate on their total income of $78,000 (tax requirement, $30, divided by taxable income, $78,000) would be 0.038%.
If this same person lived in Utah, all of their taxable proceeds—both earned and unearned—would be subject to that state’s 4.95% flat tax rate. In that case, their tax neb would be $3,861 ($78,000 × 0.0495).
In terms of federal taxes, in 2021, under the progressive system, this taxpayer would pay $995 on the chief $9,950 of their income (excluding interest) which falls into the 10% tax bracket. They would pay 12% on their profits from $9,950 to $40,526 ($3,669.12), and 22% on the amount greater than $40,526 ($7,584.28) for a total federal tax bill of $12,248.40. Their noticeable federal tax rate would be 16.3%.