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Income Tax Brackets and State-By-State Differences

Tax season is coming: How is your income tax determined and how much do you pay based on the state you live in?

If you're lucky enough to know someone and be able to afford an accountant, tax season is easy. Send it their way and it's done. But if you're doing taxes yourself this season, it may be a little trickier.

You may be interested in learning more about the specifics of your taxes. What are they and how do they get used? At what rate is your money being taxed, and how does where you live impact that? If you've never done your own taxes, it's understandable this can all get a bit confusing.

So let's start from the very beginning. What is income tax, and what do you need to know?

What Is Income Tax?

Income tax is, basically, the taxes put on everything you earned over the past year as income.

Taxable income is a surprisingly wide category. If you have a full-time job, that's probably going to account for the majority of your income that's going to get taxed. But it's far from the only thing that's getting taxed.

In addition to full-time income, freelance and self-employment income gets taxed, as do any unemployment benefits you receive from the government. Severance pay can also get taxed. Additional wages and tips are also subject to taxation. Essentially, income from a job is taxed - whether that job is maintained or lost.

The interest you make from an investment, as well as any possible dividends you receive from it, are subject to taxation. If you receive alimony from a former spouse, it is also taxed, unless your divorce occurs after 2019. Rental income is taxed too. Other earnings that are subject to income tax can include fees paid for jury duty, royalty payments, union benefits from a labor strike, lottery winnings and capital gains (though there is an exception for the sale of your primary residence).

While these are subject to income tax, certain forms of earnings - workers comp, child support and scholarships as some notable examples - are not subject to these taxes.

Everything you earn as a form of income that can be taxed will go far beyond just what you find on one W-2 form. And on your 1040 form, which has undergone recent changes, you'll be calculating your adjusted gross income (AGI). Taxpayers, in addition to finding out their total taxable income, have the chance with this form to make itemized deductions or claim tax credits should they qualify for them.

How Is Income Tax Used?

Your federal income taxes go toward funding any number of government programs. You don't have a say in where specifically they go to and how they're used, but there are breakdowns from previous tax years that can give a potential idea of where tax dollars may be more likely to go.

Previous federal taxpayer receipts paint a picture of where income taxes have gone in the past. As an example, let's look at the 2014 Taxpayer Receipt from the White House. Statistically, nearly 27.5% of income taxes that year went toward health care. Breaking that down even further, 12.31% of income taxes went toward Medicaid and Children's Health Insurance Program (CHIP). So if you paid $5,000 in income taxes for 2014, $1,374.50 went into health care - $615.50 of which went to Medicaid and CHIP.

Another big government department that income taxes go toward is defense. In 2014 nearly 24% of income taxes went to defense. This includes ongoing operations, research and development and military personnel salaries.

Beyond there, the taxpayer money went to funding several other government services and programs, all of which divide into several of their own specific services. These include:

  • Job and family security
  • Veterans benefits
  • Education
  • Immigration
  • International Affairs
  • Environment
  • Space
  • Agriculture

In a more general sense: your income taxes help fund the government and its services. The specifics of it tend to be based on what the current government prioritizes most heavily, and what programs they have cut or added spending to.

Income Tax Brackets: What Are the Tax Rates?

How much you will owe in income taxes depends on how much taxable income you made over that year. Income is placed into tax brackets to determine how much it is taxed.

In a bracketed system, those who make more money get taxed a higher percentage for that additional money they make. The ideal execution of this system is that those in the top percentages of income in the country pay a significantly higher level of taxes on their millions than those who make far less.

The income you make is taxed at various rates depending on how much you make: 10%, 12%, 22%, 24%, 32%, 35% and 37%. The specific income ranges that get put into these tax ranges will depend on whether you filed your taxes as a single person, married filing jointly, married filing separately or head of household.

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If you were to calculate how much you owed in taxes by knowing how much taxable income you made that year, you'll need to calculate all tax brackets you are technically in. Let's say you filed as a single individual and made $100,000 in the last year. For a single filer, the first $9,700 gets taxed at 10%, or $9700. The $9,701-$39,475 range gets taxed at 12%, which comes out to $3,572.88. $39,476-$84,200 is taxed at 22%, aka $9,839.28. The rest of your income is taxed at 24%, which ends up being $3,791.76.

Add them up ($970 + $3,572.88 + $9,839.28 + $3,791.76) and you end up with $18,173.92 in taxes for the year. That means even though you're technically in the 24% tax bracket, overall you paid nearly 18.2% in income tax.

Personal Income Tax vs. Business Income Tax

The federal government also requires corporations to pay income tax. They also recently gave those corporations a major tax break.

Toward the end of 2017, the government passed the Tax Cuts and Jobs Act (TCJA), and a large part of this act was cutting the maximum federal corporate income tax, which had previously been 35%, all the way down to 21%. That's the lowest it has been since the 1930s.

When preparing a tax return for a corporation, Form 1120 is used, instead of the 1040 for a personal tax return. On this form, the income is calculated and reported. Taxable income is figured out after all necessary deductions are factored in.

State-by-State Differences in Income Tax

You are generally subject not only to federal income tax but state income tax as well.

State income taxes can vary wildly depending on where you live, compared with the set federal tax rates. Some states have their own set of tax brackets for state income tax, some have a flat rate, and some have no state income tax at all. What does your state do?

States With No Income Tax

Living in a state with no income taxes is the easiest way to calculate how much you owe in state income tax (you don't!), but it's also the least likely of these scenarios. Only seven states have absolutely no state income tax. Those are:

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

    In addition to these seven states, there are two that technically don't have a state income tax, but there's a bit more to the story than that. Those are New Hampshire and Tennessee. These states do not tax your wages, but they do tax most income stemming from the dividends and interest from your investments. These are taxed at a flat rate - 5% in New Hampshire, 6% in Tennessee.

    There are some exceptions to what dividends and interest are taxed; interest from personal life insurance is taxable in New Hampshire, but interest from their Individual Retirement Account (IRA) is not.

    States With Flat Income Tax Rate

    There are eight states in America with a flat state income tax rate. That certainly makes it easier to calculate what you're paying in taxes than a bracketed system, but it does mean if you make $10,000 a year in one of these states you're paying the same state tax rate as someone who makes $10 million is.

    Here are the eight states with a flat rate:

    StateIncome Tax Rate<br>











    North Carolina






    States With Income Tax Brackets

    The rest of the states in the nation (as well as D.C.) use their own set of tax brackets.

    The range of these brackets vary depending on the state. In North Dakota, the range is 1.1% to 2.9%. In California, though, it goes all the way from 1% to 13.3%, and for Hawaii, it's 1.4% to 11%.

    Another major difference between a lot of states is at what point the highest tax rate takes effect. Some states require very little income for it to reach the highest bracket while others require quite a lot. Alabama's highest rate (5%) kicks in at just $3,000, Georgia's highest rate (5.75%) at $7,000 and Oklahoma's highest rate (5%) at $13,00. In the District of Columbia, on the other hand, the highest tax bracket of 8.95% applies to income over $1 million. New York income taxes don't reach their peak of 8.82% until income reaches $1,077,550. Hawaii's highest bracket is 11%, which is reached at over $200,000 worth of income.

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