Working and living in different states? How do tax withholdings work?

how does state income tax work

The roads you drive on, the schools you attend and send your children to, the parks you have picnics in and even the hospitals you turn to when you’re sick are all paid for, at least in part, by your tax dollars. Eight states—Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming—levy no state income tax whatsoever. New Hampshire, which currently taxes investment income and interest but not earned wages, is set to join this list in 2027 once it phases out taxation on unearned income. Proponents of the income tax also argue that states that use income taxes to develop quality education systems and infrastructure will attract families to the area. Critics also point to the difficulty of replacing the revenue brought in by state income taxes, which may inevitably lead to cutting state services, education, and infrastructure. One view of state income tax is that fewer income taxes will encourage growth, resulting in a revenue neutral or revenue positive position for states.

Nevada does not tax unearned income, and New Hampshire does not tax wages and salaries. Other think tanks find no benefit to a reduction in state income tax. Many analysts find a reduction in income tax would undermine the state’s ability to provide services. States that want to eliminate the income tax may not have the natural resources or economy needed to replace the loss of revenue from income taxes. Some mineral-rich states such as Texas, Wyoming, and Alaska collect severance taxes on natural-resource extraction. Other states, such as Florida, South Dakota, and Washington, collect double the national average in sales tax.

The IRS released its 2024 tax brackets. Here’s how to see yours.

In total, a married couple 65 or older would have a standard deduction of $32,300. You can also itemize individual tax deductions, for things like charitable donations, but how does state income tax work they need to add up to more than the standard deduction to make itemizing worthwhile. Job growth might not also be able to keep up with the rapidly expanding population.

  • If you cross state lines for your job, you may or may not have to file taxes in another state, too.
  • Check state tax laws and keep your employer informed of your whereabouts so they can make proper withholdings.
  • Their combined effective tax rate (state and federal) is $20,183 divided by their taxable income of $112,000, or 18%.
  • For example, unlike the federal government, states often tax municipal bond interest from securities issued outside that state.
  • Forty-one states and the District of Columbia levy broad-based taxes on individual income.

Your bracket only determines your individual income tax rates for each additional dollar of income (ignoring the effects of rounding). Federal income tax rates are based on your income and filing status—not by where you live. Therefore, the same federal tax rates apply to everyone, no matter which state is their residence.

What is a state income tax?

If no federal income tax is taken out of your paycheck, it could be that an error was made. Some people are exempt from paying federal tax, based on how much they earn or their age, for example. In this case, you would not have federal tax taken out of your paycheck.

Thus, if a taxpayer earns enough to reach a new bracket with a higher tax rate, his or her total income is not taxed at that rate, just the income in that bracket. Even a taxpayer in the top bracket has some portion of income taxed at the lower rates in the tax schedule. For example, a single filer with $60,000 in taxable income falls into the 22 percent bracket but does not pay tax of $13,200 (22 percent of $60,000). Instead, he or she pays 10 percent of $9,875 plus 12 percent of $30,250 ($40,125 – $9,875) plus 22 percent of $19,875 ($60,000 – $40,125) for a total of $8,990.

IRS announces new tax brackets for 2024. What does that mean for you?

Some people think that if their income increases and they are bumped into a higher tax bracket, they will pay taxes at a higher rate on all their income. With this reasoning, some tax filers believe they may have less money left over than they would if they had earned less. State income tax is a direct tax collected by U.S. states on income materialized in a given state.