State vs. Federal Tax - What's the Difference?

Published: 29th January 2021

During the Civil War, Abraham Lincoln signed the nation's first tax on personal income into law.

While it was ruled unconstitutional years later, the 16th amendment was passed in 1909 that allowed the federal government to tax personal income regardless of a given state's population.

Even though we're supposed to pay taxes, almost 50% of Americans don't. It's important to pay your taxes, though, and to understand the difference between state vs. federal tax.

Paying your taxes is the best way to ensure you don't run into legal and monetary issues down the road.

Keep reading to learn more about taxation and the difference between state vs. federal.

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Who Must Pay Taxes?

State Verse Federal Tax What Is The Difference - Are you filing your own taxes this year? If so, it's important you get to know the difference between state vs. federal tax.

By United States law, any American who has a gross income of over $10,000 or who earned over $400 while self-employed must file federal taxes.

There are other stipulations that require individuals to file, too, such as selling your home or withdrawing early from a retirement account.

In 1913, the due date to file was March 1st, but after getting pushed forward a couple of times, the date is now April 15th.

Why Do We Pay Taxes?

Under federal law, Congress has the power to layout and then collect Americans' taxes. From education to defense, the taxes we pay end up in a number of different places.

When it comes to state taxes, the state legislature decides what taxes to impose, whether or not to enact rate increases, and if those taxes will be enough to cover state spending. They compare that structure to competing states.

Some states, such as Florida, Alaska, and Wyoming, boast no state income taxes.

If you aren't sure how much you might owe in taxes, you can always use an Annual Tax Calculator to calculate both your federal income tax and state income tax for a given year.

What Is Federal Tax?

Our federal income tax is levied by the IRS (Internal Revenue Service). The tax is based on the annual earnings of corporations, trusts, other legal entities, and individuals. These taxes are applied to all types of earnings, including employee salaries and capital gains.

The federal income tax is the largest source of revenue for the United States government. It's used to do things, such as:

  • Repair our country's infrastructure
  • Improve education
  • Improve public transportation
  • Provide disaster relief (including emergencies)
  • Fund pensions and benefits of government workers
  • Provide housing and food assistance to those in need
  • Explore new things such as space exploration
  • Improve defense, agriculture, and utilities

American workers receive their earnings either as gross or net income. Net income equals the total amount earned after federal tax gets deducted. In other words, sometimes the payer or company withholds the tax and pays the government on the worker's behalf.

Those who get paid their gross income must pay the government what they owe in taxes on their own.

The system works by taxing higher-income earners at a higher rate. Those who earn below the threshold pay little to no tax.

Federal income tax is different than income tax as income tax refers to state tax.

What Is State Tax?

State income tax is a tax levied by the state in which you live. Income is what you earned either in that state or from another state. If you have one state of residence, your state income tax may mean all the income you made in other states.

Not all states impose an income tax on their citizens. 41 states and Washington, D.C., require their residents to pay income tax. The laws, procedures, rates, and forms still vary greatly from state to state, though.

Tax law states that you must file a state tax return for each tax-levying state in which you've earned income. However, only the state in which you live has the authority to tax all of your income.

There are 7 states that don't impose a state income tax:

  • Alaska
  • Florida
  • Nevada
  • South Dakota
  • Texas
  • Washington
  • Wyoming

In addition, Tennessee and New Hampshire tax only unearned income. However, over the next few years, they'll both end that practice.

State taxes are due on the same day as federal taxes: April 15th. However, the deadlines were pushed this past year because of Covid-19. If you have residency in a state that levies an income tax, you can't avoid paying taxes by working in a no-income-tax state.

You must pay taxes in your home state, regardless of where you earn money.

Just as it is with federal income tax, states require taxpayers who receive gross pay to pay their self-employment or income tax. If you fail to file, the state will impose penalties and interest.

What Does State Tax Pay For?

State taxes pay for public education for grades K through 12. They also pay for Medicaid and Children's Health Insurance Programs.

State taxes also pay for things like:

  • Transportation (maintaining and building bridges and roads)
  • Public higher education
  • Corrections
  • Safety net programs

State taxes cover a significant amount of the services that we use every day as citizens.

Know the Difference Between State vs. Federal When You File Taxes

While some people are reluctant to file taxes, it's empowering when you know and understand where your money is going and why it's going there.

Knowing the difference between state vs. federal taxes helps us understand how paying taxes benefits us as citizens.

However, some incomes and states warrant more tax than others, so it's a good idea to consider that in choosing where you want to live and work. If you want to make some comparisons, take a look at the many calculators we offer to help you calculate tax and income and help you manage your finances.

Do you have additional questions or concerns? Contact us so that we can help!