When you look at your paycheck, you see multiple tax deductions. Federal and state taxes are separate systems with different rules. Understanding both helps you plan better.
The Two-Level System
Federal Taxes
- Go to the U.S. Treasury
- Same rules nationwide
- Fund national programs (defense, Social Security, Medicare)
- Progressive brackets (10% to 37%)
State Taxes
- Go to your state government
- Vary dramatically by state
- Fund state programs (education, roads, state police)
- Range from 0% to 13%+
States With No Income Tax
Nine states don't tax income:
- Alaska
- Florida
- Nevada
- New Hampshire (dividends and interest only)
- South Dakota
- Tennessee
- Texas
- Washington
- Wyoming
Pro Tip
No income tax doesn't mean no taxes. These states often have higher property or sales taxes.
How State Tax Systems Differ
Flat Tax States
Everyone pays the same rate regardless of income.
- Colorado: 4.4%
- Illinois: 4.95%
- Utah: 4.65%
- Pennsylvania: 3.07%
Progressive Tax States
Higher income = higher rate (like federal).
- California: 1% to 13.3%
- New York: 4% to 10.9%
- New Jersey: 1.4% to 10.75%
No Tax States
Listed above—keep all your income (from the state, anyway).
How They Interact
Different Taxable Income
Federal and state don't always use the same "taxable income."
Federal deductions that don't always apply to state:
- State and local tax deduction (SALT)
- Some retirement contributions
- Certain business deductions
Timing Differences
Some states don't conform to federal law changes immediately.
Filing
You typically file separately:
- Federal return (Form 1040)
- State return (varies by state)
Tax software handles both automatically.
Working in Multiple States
If You Work in One State, Live in Another
You may owe taxes to:
- State where you work (source state)
- State where you live (resident state)
Credit for taxes paid: Your home state usually gives credit for taxes paid to your work state to avoid double taxation.
Remote Work Complications
Remote work has created new confusion:
- Some states claim you owe taxes if your employer is there
- Rules are evolving and contested
- Check your specific situation
State-Specific Considerations
High Tax State Strategy
If you're in California, New York, New Jersey, or similar:
- Maximize pre-tax retirement contributions (reduces state AND federal taxes)
- Consider 529 plans for state deductions
- Be aware of state alternative minimum tax (AMT)
Moving to a Low-Tax State
Can save significantly, but consider:
- Cost of living differences
- Career opportunities
- Quality of life factors
- Changing residency rules (usually 183+ days)
Watch Out
States scrutinize "moves" for tax purposes. You need genuine residency change, not just a mailing address.
Local Taxes Too
Some places add a third layer:
- New York City: Additional 3-4%
- Ohio cities: 1-3% local income tax
- Pennsylvania localities: Various rates
These are on top of state taxes.
Strategic Opportunities
State Tax Deductions
Some states offer deductions that federal doesn't:
- 529 plan contributions
- Specific credits for certain industries
- Property tax credits
Different Standard Deductions
State standard deduction may differ from federal. Sometimes itemizing makes sense for state but not federal (or vice versa).
Retirement Planning
Retiring in a no-tax or low-tax state can stretch retirement savings significantly.
The Bottom Line
Federal and state taxes are separate systems with different rules. Your total tax burden depends heavily on where you live. High earners in high-tax states pay over 50% marginal rates combined, while those in no-tax states pay only federal rates. Factor state taxes into major financial decisions like job changes and retirement planning.