State Income Tax vs. Federal Income Tax: What’s the Difference?

State Income Tax vs. Federal Income Tax: An Overview

The U.S. has a multitiered income tax system under which taxes are imposed by federal, state, and sometimes local governments. Federal and state income taxes are similar in that they apply a percentage rate to taxable incomes.

However, they differ considerably regarding those rates and how they’re applied, and by the type of income that is taxable and the deductions and tax credits allowed.

State Income Tax

State income taxes can vary considerably from one state to another. Most states have either a flat or progressive income tax system. A flat tax system (also called a single-rate structure) applies a single tax rate to all income levels.

Flat Tax States

As of 2024, 12 states use the flat tax method: Arizona (2.5%), Colorado (4.4%), Georgia (5.49%), Idaho (5.8%), Illinois (4.95%), Indiana (3.05%), Kentucky (4.0%), Michigan (4.25%), Mississippi (4.7%), North Carolina (4.5%), Pennsylvania (3.07%), and Utah (4.65%). Washington has a flat tax that only applies to the capital gains income of high-earners, and Iowa is phasing in a flat tax by 2026.

Progressive Tax States

In states that use progressive tax systems, greater income levels are taxed at a higher percentage rate. This is the same system used in the federal income tax system. Some states base their marginal tax brackets for this purpose on the federal tax code, but many states implement their own.

Some adjust their brackets annually to keep pace with inflation, as the federal government does, while others do not.

Hawaii has 12 tax brackets, while Kansas and six other states have only three. California’s progressive tax system has the highest top tax rate of 13.3%, which applies to single filers with taxable incomes over $1 million and married couples with incomes over $1,396,542.

North Dakota has the lowest top marginal tax rate, with a 2.5% rate that applies to single filers with incomes over $225,975 and married couples with incomes over $275,100.

States With Little or No Income Tax

Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming don’t tax residents on their income.

Federal Income Tax

The U.S. Internal Revenue Code (IRC) outlines the federal income tax rules. It went through significant changes in 2018 when the Tax Cuts and Jobs Act (TCJA) was passed. The law enacted seven tax brackets ranging from 10% to 37% that determine which portion of a taxpayer’s income falls into each bracket.

And here’s what they are for 2025:

Federal Taxes: Standard Deduction vs. Itemized

Taxpayers can claim either a standard deduction or itemize their deductions under the federal tax system. Standard deductions are adjusted for inflation annually and vary based on a taxpayer’s filing status. They increased considerably in 2018 due to the TCJA, making it advantageous for many taxpayers to take the standard deduction.

Deductions reduce the amount of taxable income that is used to determine a taxpayer’s tax liability. Generally speaking, taxpayers should use the deduction approach that reduces their taxable income the most.

As mentioned above, states and the federal government differ in terms of the types of income that are taxed and the deductions and tax credits that they allow. For instance, pension and Social Security income is taxable under federal rules, while some states exempt these sources of income from taxation.

Other income exemptions include earnings from U.S. Treasury securities, such as savings bonds. These sources of income are exempt from state tax but are subject to federal taxes.

State Income Tax vs. Federal Income Tax Example

Consider a single taxpayer who lives in New Hampshire and reports taxable earned income of $75,000 a year plus interest income of $3,000 on their federal tax return.

State Taxes

We’ll start with the state income taxes. New Hampshire has a $2,400 tax exemption for the interest and dividends tax, so tax is due only on the remaining $600 ($3,000 − $2,400) of interest and dividends income.

This means the taxpayer would pay $18 ($600 × 0.03) in state taxes because New Hampshire taxes interest and dividend income only, at the rate of 3% (as of Jan.1, 2024). The taxpayer’s effective state tax rate on their total income of $78,000 (tax obligation, $18, divided by taxable income, $78,000) would be 0.030%.

If this same person lived in Utah, all of their taxable income—both earned and unearned—would be subject to that state’s 4.55% flat tax rate (as of Jan.1, 2024). In that case, their state tax bill would be $3,549 ($78,000 × 0.0455).

Federal Taxes

In terms of federal taxes, in 2024 under the progressive system, this taxpayer would pay $1,160 on the first $11,600 of their income (excluding interest) that falls into the 10% tax bracket. They would pay 12% on their income from $11,601 to $47,150 ($4,266), and 22% on the amount greater than $47,150 ($6,127) for a total federal tax bill of $11,553. Their effective federal tax rate would be 15.4% ($11,553 ÷ $75,000).

The Bottom Line

Federal taxes are the same wherever you live in the U.S. State taxes can differ significantly—both in amount and in the philosophy behind them.

Some states charge a flat tax and others use a progressive system that taxes high-income taxpayers more than others. So be sure to take state taxes into account when comparing the cost of living in various places if you have a choice of jobs or are considering relocating.

Note that income taxes are just one element of taxation—property taxes, sales tax, and other measures can play a role in the way that states raise revenue.