State Income Tax vs. Federal Income Tax: What's the Difference?

State Income Tax vs. Federal Income Tax: An Overview

The U.S. has a multitiered income tax system under which taxes are imposed by federal, state, and sometimes local governments. Federal and state income taxes are similar in that they apply a percentage rate to taxable incomes. However, they differ considerably regarding those rates and how they're applied—and by the type of income that is taxable and the deductions and tax credits allowed.

State Income Tax

State income taxes can vary considerably from one state to another. Most states have either a flat or progressive income tax system. A flat tax system (also called a single-rate structure) applies a single tax rate to all income levels. 11 states use this method, as of 2023: Arizona (2.5%), Colorado (4.55%), Idaho (5.8%), Illinois (4.95%), Indiana (3.23%), Kentucky (4.5%), Michigan (4.25%), Mississippi (5.0%), North Carolina (4.75%), Pennsylvania (3.07%), and Utah (4.95%).

In states that use progressive tax systems, greater income levels are taxed at a higher percentage rate. This is the same system used in the federal income tax system. Some states base their marginal tax brackets for this purpose on the federal tax code, but many states implement their own. Some adjust their brackets annually to keep pace with inflation, as the federal government does, while others do not.

Here's a look at the top state marginal individual income tax rates for the 2022 tax year:

Hawaii has 12 tax brackets, while Kansas and six other states have only three. California's progressive tax system has the highest top tax rate of 13.3%, which applies to singles with taxable incomes over $1 million and married couples with incomes over $1,250,738. North Dakota has the lowest top marginal tax rate, with a 2.9% rate that applies to singles and married couples with incomes over $445,000.

Some states have little to no income tax: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming don't tax residents on their income. New Hampshire taxes only income from interest and dividends—not earned income from salary and wages. The state is phasing this out gradually and plans to repeal this fully by January 2026. Tennessee used to tax interest income and dividends, but it completed a phase-out as of Jan. 1, 2021.

Federal Income Tax

The U.S. Internal Revenue Code (IRC), which spells out the federal income tax rules, underwent some significant changes, effective in 2018, with the passage of the Tax Cuts and Jobs Act (TCJA). There are now seven marginal tax brackets at the federal level: 10%, 12%, 22%, 24%, 32%, 35%, and 37%.

For the 2022 tax year, the top rate of 37% kicks in at $539,900 for singles and $647,850 for married couples filing jointly. For tax year 2023, the 37% rate kicks in at $578,000 for single filers and $693,750 for married couples filing jointly.

Here's a breakdown of the tax brackets and rates for 2022:

And here are the tax brackets and rates for 2023:

Federal Taxes: Standard Deduction vs. Itemizing

Taxpayers can claim either a standard deduction or itemize their deductions under the federal tax system. Standard deductions increased considerably in 2018 under the TCJA, making it more advantageous for many taxpayers to take the standard deduction.

Here's a look at the standard deductions for the 2022 and 2023 tax years:

As mentioned above, states and the federal government differ in terms of the types of income that are taxed and the deductions and credits they allow. For instance, pension and Social Security income are taxable under federal rules, while some states exempt these sources of income from taxation. Other income exemptions include earnings from U.S. Treasury securities, such as savings bonds. These sources of income are exempt from state tax but are subject to federal taxes.

State Income Tax vs. Federal Income Tax Example

Consider a single taxpayer who lives in New Hampshire and reports taxable earned income of $75,000 a year plus interest income of $3,000 on their federal tax return.

We'll start with the state income taxes. New Hampshire has a $2,400 tax exemption for the interest and dividends tax, so tax is due only on the remaining $600 ($3,000 − $2,400) of interest and dividends income.

This means the taxpayer would pay just $30 ($600 × 0.05) in state taxes because New Hampshire taxes interest and dividend income only—at the rate of 5%. The taxpayer's effective state tax rate on their total income of $78,000 (tax obligation, $30, divided by taxable income, $78,000) would be 0.038%.

If this same person lived in Utah, all of their taxable income—both earned and unearned—would be subject to that state's 4.95% flat tax rate. In that case, their state tax bill would be $3,861 ($78,000 × 0.0495).

In terms of federal taxes, under the progressive system, this taxpayer would pay $995 on the first $9,950 of their income (excluding interest) that falls into the 10% tax bracket. They would pay 12% on their income 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 effective federal tax rate would be 16.3%.

The Bottom Line

Federal taxes are the same wherever you live in the United States. But state taxes can differ significantly—both in amount and in the philosophy behind them. Some states charge a flat tax and others use a progressive system that taxes high-income taxpayers more than others. Take state taxes in account when comparing the cost of living in various places if you have a choice of jobs or are considering relocating. Note that income taxes are just one element of taxation—property taxes, sales tax, and other measures can come into play in the way states raise revenue.