Guides on Income Tax Rates in America
Everything you need to know about calculating Income Tax rates in America
02/06/2021
In some ways, it
makes sense that a country as big as the USA has
a complicated system of government. Through
which some issues are governed by the state,
rather than by a federal government. On the
whole, this leads to the rules reflecting the
state they are in, however, things can get a
little complicated if you move from one state to
another.
One of these
locally governed issues is Income Tax.
The way Income Tax is treated varies wildly from
state to state. With some states having
incredibly high rates and other states charging
no Income Tax at all. If you are a high earning
individual you may find yourself tempted to
relocate to a state with kinder tax rates.
In this article, we are going to cover
everything you need to know about paying Income
Tax in the United States of America. We will be
looking at what Income Tax is, what your state
government will use the payments for, and which
states charge which type of Income Tax.
What is Income Tax?
Income Tax is a tax that you have to pay on
the money that you earn from your employment.
Your income is taxed by your State Government
rather than by the Federal Government.
How much Income Tax that you have to pay will
depend on which state that you live in. In some
states, you will not have to pay anything, while
in other states you will pay progressively
depending on how much money you have earned in
the past year.
What is your Income Tax Used for?
As your Income Tax is paid to your local
state government, rather than the federal
government - we cannot explicitly state what
your Income Tax is being used on.
However, it is more likely to be funding local
projects rather than
federal ones.
Some
of the taxes you pay will go to paying the
salaries of the government officials who run
services like your local department of
Sanitation, or local education. Because this
money goes to the local government you are more
likely to see it have a direct impact on your
local area.
Your local government may
use this money to build parks in your state or
to build more social housing.
They may
choose to put into education - this includes
state colleges that provide higher education at
a more affordable rate.
Your local
government may decide to spend state tax money
on relief funds. This can include support for
veterans, the elderly, and people whose lives
have been affected by natural disasters.
Some of your taxes will go into the prison
system, helping to provide adequate correctional
facilities. With the hope of rehabilitating
offenders.
More of your state tax
dollars will go towards providing affordable
health care in your state. This can include
paying for operations for sick children without
bankrupting their parents and providing health
care for retired pensioners.
There is a
small amount of your state taxes that go into
state pensions that help to support the
vulnerable members of our society.
The 3 types of income tax
Now that we have covered what Income Taxes are and what they are used for. Let's look at the forms income tax takes in this country.
There are three main variations on Income Tax among the states.
Firstly,
there are states that pay no Income Tax.
Secondly, there are states that pay a flat
rate on income tax - no matter how much money
they are earning. Income, shares, dividends, and
bonuses are included in this.
Finally,
there are states where Income Tax is charged
progressively. Meaning that the more you earn
the more you will be taxed on your earnings.
Progressive Income Tax
Many people misunderstand how progressive
income tax works.
The system works via a
system of tax bands. If you earn more you will
be in a higher tax band and pay more money.
However, it is a progressive system meaning
that you are charged different tax rates if your
pay falls in one of the higher bands.
Here is an example:
• If a state has three tax bands
• $20,000-$30,000 - pay 5%
• $30,000-$40,000
- pay 10%
• $40,000-$50,000 - pay 12.5%
If you earn $35,000 in this state you do not
pay 10% on your whole paycheck. Instead, you
will pay 5% on the first $30,000 you earn, and
then you will pay 10% on the extra $5000.
This way you are not punished by the tax
system for earning more money.
How do I know which state to pay my taxes to
Most of us are lucky enough to only have to
work in one state for the whole of the year.
If this is the case for you then you will
pay tax to the state that you live and work in.
Where the confusion often occurs is
when people work in multiple states or have to
travel frequently for work.
If you
travel a lot for work then you should only have
to pay tax in the state that you are based. For
example, if you are based out of Washington
State, but often travel to Florida for your
company then you will only have to pay Income
Tax in Washington State because that is where
your job is based.
However, if you have
one job based in Washington State and another
job based in Florida then it is highly likely
that you will have to pay Income Tax to both
states. You may also have to pay other types of
taxes in both areas.
Which States pay a Flat Income Tax Rate
There are a good number of states that charge a flat rate of Income Tax rather than use progressive tax bands. They are as follows:
• Colorado
• Illinois
• Indiana
• Kentucky
• Massachusetts
• Michigan
• North Carolina
• Pennsylvania
• Utah
In these states, you will be charged the same
percentage of Income Tax whether you earn
$65,000 or $500,000.
The percentage of
Income Tax due varies from state to state. With
places like North Carolina charging as high as
5.25% tax on all incomes. And places like
Pennsylvania only charge 3.07% of Income as tax.
Which States pay no Income Tax
There are some states that charge no Income
Tax. These states are popular places to live for
high earning individuals.
Particularly,
places like Wyoming that have recently slashed
their business tax rates as well. Over the past
few years, this state has seen increasing
numbers of businesses and billionaires
relocating to
within its borders.
There are the following states that charge no Income Tax to their residents:
• Alaska
• Florida
• Nevada
• South
Dakota
• Texas
• Washington
• Wyoming
Here is a detailed guide to states by Income Tax rates.
States with unique rules
There are two states that have different Income Tax rules from the rest of the country: New Hampshire and Tennessee.
New Hampshire:
While New Hampshire charges its residents no
Income Tax it does charge 5% interest on any
money earned through dividends and interest.
This will mostly affect business owners,
investors, and creditors. But these charges are
unlikely to affect the average resident of New
Hampshire.
Tennessee:
Up until January 2021, Tennessee had very
similar rules to New Hampshire. But at the start
of the year, they dropped their taxes on
Interest-based income.
They now only tax
income that comes from business dividends. They
tax these earnings at 1%.