Key Takeaways
- Federal tax is collected by the IRS and applies the same way in every state, while state tax rules and rates depend on where you live.
- Nine states, including Texas and Florida, don’t charge a state income tax at all.
- Federal taxes pay for national programs like defense, Social Security, and Medicare, while state taxes fund local services such as schools, roads, and public safety.
- You usually need to file a separate return for federal tax and for state tax, even though both cover the same income.
- Knowing your state and federal taxes ahead of time makes it easier to budget for what you’ll owe or plan for a refund.
Tax season can feel confusing, especially once you realize you’re not just filing one return. Most people owe both federal tax and state tax, and the rules for each one are different. Federal tax is the money you pay to the U.S. government, while state tax goes to the state where you live or work. Understanding the difference between federal and state taxes can help you know what to expect, what you owe, and how to file both correctly.
This guide breaks down federal tax vs. state tax in plain language, so you can see how each one works and how they fit together.
- At a Glance: Federal vs. State Income Taxes
- What Is Federal Tax?
- What Is State Tax?
- How Do Federal and State Taxes Work Together?
- How to File Federal and State Taxes
- Federal vs. State Income Taxes: FAQs
- Ensure Both Your Federal and State Income Taxes are Filed Correctly
At a Glance: Federal vs. State Income Taxes
Here’s a quick breakdown of the key differences between federal vs. state income taxes:
| Feature | Federal Tax | State Tax |
| Governing body (who collects it) | Internal Revenue Service (IRS) | Your state’s department of revenue |
| Where it applies | The same for every taxpayer in the U.S. | Only in the state where you live or earn income |
| Tax structure | Progressive tax brackets, meaning rates rise as income rises | Varies by state; some use brackets, some use a flat rate, and nine states charge no income tax |
| Deductions and allowances | Standard deduction or itemized deductions set by the IRS | Set separately by each state and often different from federal rules |
| Used for | National programs (defense, Social Security, Medicare, etc) | State and local services (Schools, roads, and public safety) |
| Filing requirement | Required if your income is above the IRS threshold for your filing status | Required in most states with an income tax if you meet that state’s threshold |
| Tax return | Form 1040, filed with the IRS | A separate state return, filed with your state’s tax agency |
What Is Federal Tax?
Federal tax is the money the U.S. government collects from your income, no matter which state you live in. It’s the same system for everyone, so a teacher in Ohio and a nurse in Arizona follow the same federal rules, even though their paychecks and expenses look nothing alike.
How does federal tax work?
The IRS uses a progressive tax system. This means your tax rate increases as your income increases. Your income is divided into brackets, and each bracket is taxed at its own rate. This is different from a flat tax, where everyone pays the same percentage regardless of how much they earn.
What do federal taxes pay for?
Federal tax dollars fund programs that operate across the entire country. This includes national defense, Social Security, Medicare, federal highways, and other programs run by the U.S. government. Because these programs serve every state, everyone contributes through the same federal system.
A portion of your paycheck also goes toward Social Security and Medicare, which are sometimes called payroll taxes. These are separate from your regular income tax, but they’re still collected by the federal government and show up on the same paycheck stub.
What Is State Tax?
State tax is money collected by your state government, and it works differently depending on where you live. Some states use a progressive system similar to the federal government. Others use a flat rate, where everyone pays the same percentage, and some states don’t tax income at all.
How does state tax work?
Each state sets its own rates, brackets, and rules for deductions. That means your state tax bill can look completely different from a friend’s, even if you earn the same income, simply because you live in different states.
If you’ve ever wondered why you owe taxes at the state level when you didn’t expect to, it often comes down to your state’s specific withholding rules and deduction amounts.
Do all states have an income tax?
No. Nine states currently don’t charge a state income tax:
If you live in one of these states, you’ll still file a federal return, but you won’t owe state income tax on your wages. Keep in mind that these states often make up the difference with higher sales tax or property tax.
What do state income taxes fund?
State tax dollars typically pay for public schools, state roads and highways, police and fire departments, and other services run by your state and local government.
Because these services are managed locally, the way your money gets spent can look very different depending on where you live. A state with a larger population might put more funding toward highways and transit, while a smaller state might focus more heavily on schools or rural infrastructure.
How Do Federal and State Taxes Work Together?
Federal tax and state tax are collected separately, but they’re based on the same income. Most states start their tax calculation using your federal adjusted gross income, then apply their own rules for deductions and credits from there. A deduction you claim on your federal return might not carry over to your state return, and vice versa.
Some states also let you deduct a portion of what you paid in federal tax when calculating your taxes owed, though this isn’t the case everywhere. It’s also worth learning which tax write-offs apply at the federal level, as not every state honors the same deductions.
How to File Federal and State Taxes
Filing federal tax and state tax means preparing two separate returns, even though you’re using much of the same information for both.
- Confirm your minimum filing threshold. Every year, it’s worth checking the minimum income to file taxes for both your federal and state returns, since the thresholds aren’t always the same.
- Gather your income documents. Collect all tax documents, including your W-2s, 1099s, and any other income records, before you begin either return.
- File your federal return first. Most tax software walks you through your Form 1040 first, since your state return often pulls numbers directly from it.
- Complete your state return. Use your finalized federal numbers to fill out your state return, then apply any state-specific deductions or credits.
- Check your state’s rules. If you moved during the year or earned income in more than one state, you may need to file state taxes in more than one place.
Getting organized early and knowing how to prepare for tax season can make filing both returns much less stressful.
Federal vs. State Income Taxes: FAQs
Do you pay more in state or federal taxes?
For most people, federal tax makes up the larger share of their total tax bill. Federal tax rates are usually higher than state rates, and federal tax applies to a broader range of income. State tax amounts vary widely, and some states charge no income tax at all.
Why do I have to pay both state and federal taxes?
You pay both federal tax and state tax because they fund different levels of government. Federal tax supports national programs, while state tax pays for services specific to where you live, such as schools and roads. Each government has its own authority to collect taxes on your income.
Are state taxes higher than federal taxes?
Usually not. In most states, federal tax rates are higher than state tax rates, especially for middle and higher incomes. However, this depends heavily on your state, since some states charge no income tax while others have rates that add up quickly at higher income levels.
Which is taken out first—state or federal taxes?
Employers typically withhold both federal and state tax from each paycheck at the same time, rather than one before the other. The amount withheld depends on your W-4 and state withholding forms, along with your income and filing status.
Can you deduct state taxes on your federal return?
Yes, you can deduct state taxes on your federal return if you itemize deductions instead of taking the standard deduction. The IRS allows a deduction for state and local taxes, known as the SALT deduction, though it’s currently capped at a set dollar amount each year.
Ensure Both Your Federal and State Income Taxes are Filed Correctly
Filing federal and state taxes correctly starts with understanding how each one works and what makes them different. Once you know the basics, from tax brackets to filing thresholds, both returns become much easier to manage.
If tax season is putting a strain on your budget, Sun Loan can help. Along with personal loans, Sun Loan also offers tax preparation services, so you can get your federal and state returns filed correctly and get support if you need extra funds along the way. Explore your options with Sun Loan today.
