What to Know About Federal vs. State Taxes

New Simplified 1040 Form

If you’re still a novice when it comes to filing your taxes, you may be pretty intimidated by the idea of filing two separate returns – federal and state.

It sounds like double the work, right? Thankfully, that’s not entirely the case. Filing state taxes after you’ve filed your federal taxes doesn’t have to be difficult if you use a tax preparation software service like E-File.com.

So what makes your state taxes different from your federal taxes? Here’s what you need to know.

Federal income tax applies to everyone

Federal income tax law is imposed by the federal government. As such, it applies to everyone in all 50 states – it doesn’t matter in which state you live.

Federal income tax law divides individuals into 7 tax brackets based on income, with the lowest bracket set at 10% and the highest around 39%. With the new federal tax code, passed into law at the end of 2017, this is due to change in 2018 so that the highest bracket drops to 37 percent.

Your tax bracket is decided once you’ve figured your taxable income – in other words, after you’ve claimed your deductions and your personal exemption, if any. Once your tax bill is determined, you receive either a federal tax refund, if you’ve paid too much, or a tax bill, if you haven’t paid enough in taxes throughout the year (most full-time employees receive tax refunds).

State income tax is set by your state’s government

State income tax is  determined by the government of the state in which you live. That’s why you’ve likely heard of some states as “tax-friendly” – these are states that levy either no income tax (that’s right – no state income tax whatsoever) or very low income taxes.

In general, Southern states tend to have some of the lowest state income tax rates, while states like California, Oregon, and New York have some of the highest.

The other state tax you’re probably familiar with, even if you haven’t really noticed it before, is sales tax. Again, certain states impose no state sales tax, but most do. This tax is usually levied at the point of purchase, so it’s not something you have to add on to your state tax return. Some municipalities also impose municipal sales taxes, but most taxpayers will only see state sales tax.

What do state taxes pay for?

According to CBPP.org the majority of state taxes, regardless of the state in which you live, go toward paying for public K-12 education and healthcare – specifically, Medicaid and the Children’s Health Insurance Program (CHIP).

The rest of the money goes toward public higher education, transportation (maintaining roads and bridges, and building new ones), corrections, and safety net programs like Temporary Assistance for Needy Families.

All in all, state taxes cover a huge amount of the services that citizens use every day – something to think about when you sign off on that state tax return!

For more, read “First Time Filer with Limited Income? Tax Tips for Parents, Guardians, and Filers.