The United States of America has the multi-tiered tax system due to which, not just the state and federal governments, but even the local governments can impose taxes. The state and federal taxes are similar in the way that a percentage rate is applicable to the taxable incomes. However, they have major differences with regards to the rates and the rules for application. In fact, even tax credits, deductions, and type of taxable income differs between state and federal income tax
Crucial details about the state income taxes
Income taxes levied by the states can vary from one state to another. Matthew Ledvina, a renowned US Tax advisor, explains that the states like Washington, Wyoming, Texas, South Dakota, and Alaska have no such income taxes at all. On the other hand, Tennessee and New Hampshire charge income tax on dividends and interest income, but not on earned income from wages and salary.
Many of the US states have a progressive or flat income tax systems. In a flat system of taxation, a single tax rate is applied to all the income level. States like Utah, Pennsylvania, North Carolina, Michigan, Colorado, and Indiana have a flat tax system. However, most states have a progressive tax system, whereby greater percentage rate comes with higher income levels.
The marginal tax bracket of some states is based on the federal codes, but others implement their own regulations in this regard. The tax brackets are adjusted annually by some states to keep pace with inflation, like the federal government, while others don’t.
The particulars of the federal income tax
The federal income tax rules of the country are spelt out the US Internal Revenue Code. At present there are seven tax brackets set at the federal level, i.e. 37%, 35%, 32%, 24%, 22%, 12%, and 10%. The top tier of 37% is levied when the taxable income is $518,401for the singles, and for the married couples jointly filing for taxes, it is $622,051.
The federal tax system lets the taxpayers claim a standard deduction or go ahead with itemizing their deductions. For the year 2020, the single taxpayers get a standard deduction of$12,400, the head of household is $18,650, and for joint filing by married couples is $24,800.
Matthew Ledvinaalso stresses on the fact that the federal and state governments do not tax the same type of income. For instance, the social security and pension income are taxed by the federal government, but many states have it exempted from income taxes.
So, as you can see, the complexities of federal and state taxes are too many to be understood and managed by an individual with no prior idea in this field. Thus, the best thing to do is to get in touch with a well-experienced tax advisor before filing for the federal and state income taxes. The expert will help you understand the nitty-gritties of the US taxes, and also maximize your savings in the process.