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The Difference Between State And Federal Taxes

The United States of America has a complex tax system that requires taxpayers to pay both federal and state taxes. The federal tax system is run by the Internal Revenue Service (IRS) while each individual state has its own tax system. Understanding the difference between state and federal taxes is important for taxpayers as the two systems differ in many ways. This article will discuss the difference between state and federal taxes, the role of each in the tax system, and the impact on taxpayers.

What are State Taxes?

State taxes are levies imposed by individual states on residents or businesses within the state. There are different types of state taxes but some common examples include income tax, property tax, sales tax, and use tax. Each state has its own tax laws that dictate how much individuals or businesses should pay in taxes. The state tax system is usually administered by the state revenue department which collects taxes from taxpayers.

What are Federal Taxes?

Federal taxes, on the other hand, are taxes imposed by the federal government on citizens for the purpose of funding public programs. The federal tax system is governed by the Internal Revenue Code (IRC) which outlines how taxes are levied, calculated, and collected by the IRS. Some common federal taxes include individual income tax, Social Security tax, Medicare tax, corporate income tax, estate tax, and gift tax.

Federal tax laws apply to all states and residents of the United States regardless of whether they live or work in the state or not. Federal taxes are also imposed on all forms of income received by individuals and businesses, including wages, salaries, interest, dividends, and capital gains.

How are State and Federal Taxes Different?

One of the main differences between state and federal taxes is their purpose. State taxes are used to fund state government programs such as public schools, roads, and law enforcement. Federal taxes, on the other hand, are used to fund national programs such as Social Security, Medicare, national defense, and infrastructure projects.

Another difference between the two is the amount of taxes paid. State taxes are usually lower than federal taxes as the state is responsible for a smaller area and a smaller population. However, this is not always the case as some states have higher tax rates than others. State taxes are also based on the taxpayer’s income, property, or consumption within the state.

Federal taxes, on the other hand, are based on a taxpayer’s income regardless of the state in which they live or work. The federal government has the power to set tax rates for all individuals and businesses regardless of their location. This can result in higher tax bills for residents in high-income tax states such as California, New York, New Jersey, and Illinois.

State taxes also vary from state to state. Some states have no income tax while others have a flat tax rate or a progressive tax rate system. Property tax rates also vary widely from state to state. Sales tax rates range from zero to over 10% depending on the state.

Federal taxes, on the other hand, are calculated based on a progressive tax rate system. This means that the more an individual earns, the higher the tax rate they pay. The tax rate for the highest income earners is currently 37%. The tax rate for other income groups varies from 10% to 35%.

How are State and Federal Taxes Collected?

State taxes are collected by the state revenue agency which is responsible for maintaining tax records and processing tax returns. These agencies also enforce tax laws and collect delinquent taxes from individuals or businesses. Some states also use private collection agencies to collect taxes.

Federal taxes are collected by the IRS which enforces tax laws, processes tax returns, and collects delinquent taxes. The IRS uses a computerized system to process tax returns and to determine tax liability. Taxpayers can file their tax returns electronically or by mail.

The IRS also audits taxpayers to ensure that they are compliant with tax laws. The agency may also impose penalties or fines for failure to pay taxes on time or for underreporting income.

What is the Impact on Taxpayers?

The difference between state and federal taxes has a significant impact on taxpayers. Taxpayers in high-income tax states may end up paying more than taxpayers in other states. Taxpayers who own property in multiple states may end up paying state taxes in each of the states they own property in. This can result in double taxation.

The federal tax code also imposes limitations on state tax deductions. Taxpayers can only deduct up to $10,000 of state and local taxes on their federal tax returns. This means that taxpayers in high-income states may not be able to fully deduct their state taxes on their federal tax returns.


State and federal taxes are an essential part of the United States tax system. They differ in purpose, amount, and collection methods. Understanding the difference between the two can help taxpayers plan their finances and avoid potential tax pitfalls. Taxpayers should consult a tax professional to determine their tax liabilities and to take advantage of any tax deductions or credits available to them.

Tax laws may apply on the local, state and federal level. In fact, many taxes are imposed from more than one jurisdiction. For example, individuals may pay state and federal income taxes, although some states do not impose an income tax.

As with any laws, federal tax laws supersede state and local laws. In no case, does a local or state law overrule a federal tax law. A tax may be imposed by all entities, but when state and local taxes are imposed, they do not negate a federal tax.

In addition, when states have decided not to impose a tax, such as Florida which has no income tax, it does not negate the individual’s responsibility to federal taxes.

When there is a conflict between local state and federal laws, the federal law is always applicable, regardless of the jurisdiction.