Like most people in the US, you probably feel like you pay tons of taxes without ever seeing a refund. Especially if you live in one of those “high tax” states – like California or New York.Do you ever wonder how your state stacks up against other states? Did you know that if you make under $50,000 per year, you’re probably paying more taxes in Alabama than in California…Taxes matter, but most people get the argument around state income taxes wrong. And with everything going on in the country today, we decided to look at what income taxes look like in all 50 states.If you’re considering moving to pay lower taxes, or relocating to another state for career opportunities, you need to know what differences you can expect to pay nationwide.
Did you know that 43 states have wage and salary taxes, while two states only tax dividends and interest income?Of these 43 states, most of them have tax brackets and tiered tax brackets with taxes varying by each income bracket, while others have one rate applying to all taxable income.7 States have no income tax at all: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. Don’t get too excited, though – when a state has no income tax, it generally makes up for lost tax revenue with higher sales or property taxes.Also, some states have different tax rates depending on your filing status, whether you are single or married. Many states expand the tax brackets for married couples to avoid the “marriage penalty” which otherwise penalizes married couples with dual income by taxing them in the same brackets as single taxpayers.If income up to $5,000 is taxed 2% for married and single taxpayers, married taxpayers would pay more because there is the likelihood and potential for two people to earn money instead of one, resulting in a higher tax rate.Other filing statuses, such as married filing separately or head of household, have their own set of advantages and disadvantages with federal and state income tax. Most of the time, married filing separately means splitting married filing joint status in half, and foregoing certain credits permitted to married couples that file jointly.Head of Household often allows a higher standard deduction than filing single, along with federal and state credits that may help lower taxes if you meet head of household requirements. For the purpose of simplicity, we have included all the state tax information you need for single and married filing joint returns. States that follow the tax bracket method give you one tax rate applicable to the bracket your taxable income falls under.If you are a single person in California with a taxable income of $15,000, we look up your taxable income bracket on the following state tax table:
If your taxable income is $15,000, you would think you’d just owe 2% of $15,000, which is $300. But that’s not how it works.In the United States, tax brackets are tiered (or progressive). You are not just paying taxes within your income bracket. Instead, you are paying all of the marginal tax rates from the lowest tax bracket to the tax bracket in which you earned your last dollar.So, in California, if you make $15,000, you’d pay about $221.50. This is, of course, before deductions and tax credits.How did we get that?You pay 1% on your first $7,850 = $78.50.You pay 2% on the money from $7,850 to $15,000 = $143That makes your total tax $221.50.If that makes your head spin, let’s take another example.If you are a single person in Alabama with a taxable income of $15,000, we look up your taxable income bracket on the following state tax table:Below $500 = 2%$500-$3000 = 4% + $20Above $3000 = 5% + $110If your taxable income is $15,000, you owe 5% of $15,000 ($750) plus an additional $110, giving you a total tax of $860.Several states utilize a flat tax for their income tax. For example, Illinois and Indiana both charge a flat income tax to their residents, based on their Federal income tax.For example, in Illinois, the flat tax is simply 4.95% of Federal taxable income, regardless of the amount. Usually, state tax is very similar to the calculations for your federal taxable income. However, many states offer credits and exemptions that will often reduce your federal taxable income. Otherwise, taxable income normally falls into any of these categories:
Your adjusted gross income (AGI) is not necessarily going to be the same for federal and state. Some states add back certain deductions from your federal tax return, and other states allow deductions for items not included in your federal tax return. In order to accurately calculate your tax, follow the instructions on your state tax return.
It’s important to note that while income taxes rates vary from state to state, so do the services you receive. While you pay more taxes in California and New York (on average), you also get a host of benefits, including paid family leave, better unemployment insurance, better schools, a top notch higher education system, and more.While these won’t matter to everyone, they do go a long way in continuing to boost the economy. It’s a cycle – you spend on infrastructure and education, you improve the economy in your state, you create more jobs, and get more tax revenue.While taxes suck, it’s important to note what you get for what you pay.