How Are U.S. State Tax & Federal Tax Calculated?

The calculation of state taxes and federal taxes in the United States is a complex yet essential process for both individuals and businesses. Understanding how these taxes work can help taxpayers make informed decisions about their finances and ensure compliance with tax laws. While the federal government levies income taxes on all citizens, residents, and businesses across the country, state governments have varying approaches to taxation. This article will explore how both state and federal taxes are calculated, referencing relevant news and recent developments in tax policies.

At the federal level, the U.S. Internal Revenue Service IRS manages the collection of income taxes. The federal tax system uses a progressive tax rate structure, meaning that higher-income earners pay a larger percentage of their income in taxes compared to those with lower incomes. For the 2024 tax year, the IRS has defined seven income brackets, each subject to a different marginal tax rate. These rates range from 10% for the lowest bracket to 37% for the highest. To calculate federal income tax, an individual's taxable income is determined by subtracting deductions and personal exemptions from their gross income. The IRS offers two main methods for calculating deductions the standard deduction and itemized deductions. Most taxpayers opt for the standard deduction, which is adjusted annually for inflation. For example, in 2024, the standard deduction for single filers is $13,850, while married couples filing jointly can claim up to $27,700.

In addition to income taxes, the federal government also imposes payroll taxes, such as Social Security and Medicare taxes. These are typically withheld from an employee's paycheck and matched by their employer. The Social Security tax rate is currently 6.2% for employees, capped at a certain income limit, while the Medicare tax rate is 1.45%. Self-employed individuals are responsible for paying both the employee and employer portions of these taxes.

State taxes, on the other hand, vary significantly across the nation. Unlike the federal government, not all states impose an income tax. As of 2024, nine states do not levy a statewide income tax Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. Of these, New Hampshire and Tennessee still tax investment income, though they are gradually phasing out these taxes. For states that do collect income taxes, the rates and brackets differ widely. California, for instance, has some of the highest income tax rates in the country, with rates ranging from 1% to 13.3%, while North Dakota’s top rate is just 2.9%.

For states with income taxes, the calculation process mirrors the federal method but applies state-specific rules. Taxpayers must determine their taxable income by subtracting any state-allowed deductions and exemptions. Some states offer additional deductions or credits, such as deductions for retirement income or education expenses. It is important to note that state tax systems often rely on data provided by the IRS, so changes in federal tax laws can indirectly impact state returns.

Sales taxes represent another significant component of state taxation. All but five states-Alaska, Delaware, Montana, New Hampshire, and Oregon-impose a general sales tax. The average combined state and local sales tax rate in the U.S. was 8.92% as of 2024, according to the Tax Foundation. Some cities and counties levy additional local sales taxes, pushing the total rate even higher. For example, in Los Angeles, California, the combined sales tax rate reaches 9.5%. Sales taxes are typically applied to retail purchases, though certain items, like groceries or prescription drugs, may be exempt in some jurisdictions.

Property taxes constitute another major source of revenue for state and local governments. These taxes are assessed on real estate and, in some cases, personal property. Property taxes are usually calculated based on the assessed value of the property, which is determined by local tax authorities. Rates vary depending on the jurisdiction, and homeowners often receive a tax bill twice a year. In 2024, the median property tax rate in the U.S. was approximately $1,700 per year, though this figure varies greatly between states and municipalities.

Recent news highlights several trends affecting both state and federal tax policies. For instance, the Biden administration’s proposed tax reforms aim to address income inequality by increasing taxes on high-income earners. Proposed changes include raising the top marginal tax rate and closing loopholes that allow wealthy individuals to avoid taxes. Meanwhile, state-level debates continue over the introduction of new taxes or modifications to existing ones. Several states are exploring ways to reduce reliance on income taxes by broadening sales tax bases or implementing digital services taxes.

Businesses face their own set of tax obligations, which are governed by both federal and state laws. Corporate income taxes are levied at the federal level at a flat rate of 21%, down from 35% prior to the Tax Cuts and Jobs Act of 2017. State corporate taxes vary widely, with some states imposing no corporate income tax at all. Additionally, businesses must navigate various payroll taxes, excise taxes, and property taxes that apply to commercial properties.

In conclusion, the calculation of state and federal taxes in the U.S. involves multiple factors, including income brackets, deductions, exemptions, and various types of taxes. While the federal government maintains a relatively uniform tax system, state tax policies reflect the unique needs and priorities of each jurisdiction. Taxpayers must stay informed about changes in tax laws and consult professionals if necessary to ensure accurate calculations and compliance. By understanding these processes, individuals and businesses can better manage their financial obligations and take advantage of available deductions and credits.