Federal and State Tax Returns: What's the Difference?

Feb 7, 2019 | 0 Votes by Milafel - rate Your vote
They say only three things in life remain constant. One of these is taxes. In the United States, though, what tax are they referring to? Ways to Finance - Federal and State Tax Returns: What's the Difference?

The confusion may stem from the fact that the country has federal and state taxes. These two may sound alike, but they can also have broad differences.

Take, for example, the treatment of income tax.

How Income Tax Works in the Federal and State Levels

In general, a federal tax is one levied by the US government. It doesn’t matter where you are in the country. As long as you’re earning, there’s a high chance you will have to pay taxes.

A state tax is one charged by the state, although the county, municipality, or city may also have their own. In other words, it’s possible that a tax rate for, say, income can differ among the places within the state.

For the sake of comparison, let’s talk about income tax. It is the liability against your income, which can refer to wages, interest income, and dividends, to name a few.

On a federal level, the Internal Revenue Service (IRS), the agency responsible for the collection of taxes, uses a progressive tax system.

Simply put, the more income you earn, the higher your tax rate can be. Subsequently, you will pay higher taxes.

Also, if you’re an employee, most likely, you will have withholding tax. In other words, the employer has the responsibility to take away your tax due from your salary and remit it to the IRS, although you still need to file your tax returns.

How about at the state level? As of 2018, there were at least seven states that didn’t have income taxes. These were Florida, Alaska, Washington, Texas, Wyoming, South Dakota, and Nevada.

There are also some states that use a flat tax system. Regardless of the income level, the tax rate remains the same. Take, for example, in Tennessee where the rate is only 3%. In North Carolina, it’s 5.8%.

California, on the other hand, also has a progressive tax system, although the rates are lower than those of the federal level.

The states can also differ in the types of income for tax purposes. For instance, Tennessee and New Hampshire levy taxes on investment income, such as dividends and interest.

Personal Property Taxes

Personal property taxes are those levied on movable properties not connected to the building or home. These include vehicles, motor homes, and even furniture and fixtures.

These are unique to the state, which means the federal government doesn’t collect it. It doesn’t mean there’s no connection.

While you pay these taxes on the state or local level, you can deduct it from the federal income tax return if you itemize it. Currently, the federal cap is $10,000.

Knowing the differences between state and federal taxes can be overwhelming but necessary. They can help you file the correct income tax returns. These can assist you in calculating tax refunds.

Most of all, you can avoid getting the attention of the IRS.

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