State Income Tax vs. Federal Income Tax: What’s the Difference?
File for less and get more.
Your max tax refund is guaranteed.
State and federal income taxes share many similarities but are used for different purposes. Let’s explore the definitions of each so we can understand how these taxes are alike and where the differences lie.
What is the difference between state and federal taxes?
The Internal Revenue Service (IRS) collects federal income tax from taxpayers to fund the federal government, while state taxes solely fund the government in your state.
The U.S. government collects federal income tax to fund federal programs and expenses such as building infrastructure, improving public transportation, providing disaster relief, investing in public education, and financing law enforcement, to name just a few. You must also pay Social Security and Medicare taxes, which are separate from your federal income tax.
Similarly, your state collects income tax funds to pay the state’s bills and pay for things like road maintenance, education, and other public services in that particular state.
What is federal income tax?
The IRS collects federal income tax from the annual earnings of taxpayers. This includes individuals, corporations, and other legal entities.
As an individual who works as an employee, federal income tax is typically withheld from your paychecks, so you don’t have to worry about submitting individual income tax payments to the IRS on your own. However, if you are self-employed, you generally need to make quarterly estimated payments to cover your federal and self-employment taxes. Businesses must file their own federal tax returns as well.
Federal income tax rates depend on your tax bracket, which is determined by your income.
At the end of the year, you must file a federal income tax return to ensure you’ve paid an accurate amount of taxes. You’d need to pay a tax bill if your employer didn’t withhold enough federal taxes from your paycheck. If your employer withheld too much tax or you reduced your taxable income by claiming tax deductions or credits, you may get those tax payments back as a tax refund.
What is state income tax?
Your state government levies state income taxes. Like federal income tax, state taxes are imposed on businesses and individuals and collected from the annual income you earn in your state.
The percentage of state income tax withheld varies from state to state — each has its own tax laws and tax rates.
If you live in a state with income tax, you must file a state income tax return after the end of the tax year. If you earn income in more than one state or live in one state and work in another, you may be required to file multiple state income tax returns.
What are local taxes?
Local taxes are taxes imposed on filers by a county, city, or school district. The revenue from these taxes funds local public services such as schools, police departments, and roads in that specific location. Local governments rely on local taxes for a substantial portion of their funding.
Local taxes are collected in various ways, like property taxes, income taxes, or sales taxes on goods and services. The tax rate varies depending on the municipality.
How many states have state income tax?
While some states have zero state income tax, most states collect income tax. Forty-two states and Washington, D.C., have a state income tax.
New Hampshire is an outlier, as it does not tax earned wages, but it does tax unearned income like interest and dividends. The state plans on phasing out the taxation of unearned income, making it disappear entirely in 2027.
What states have no state income tax?
As of 2022, eight states have no income tax: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming.
However, Washington taxes long-term capital gains on high-income taxpayers. If you fall under this category, you will need to file a Washington state tax return.
Can I file my state income tax return with TaxAct?
Yes, TaxAct® can help you e-file your state income tax return. Our tax prep software automatically copies your federal information into your state tax forms to help you file your state tax return(s) quickly and efficiently.