Posted by Taxes Made EZ Inc

Understanding Federal, State, and Local Taxes

Understanding Federal, State, and Local Taxes

When it comes to taxes, the federal income tax is the one that gets the most attention. However, this is far from the only money American residents pay the government. Most states have income taxes, and nearly 5,000 tax jurisdictions in 17 states also have local income taxes.

Several years ago, many deductions and loans weren't reaching the local and national level. However, jurisdictions now offer more savings options. This means that taxpayers should take the time to understand how different tax levels work and use this information to help them find ways to reduce taxes in the future.


Federal and State Taxes

The federal government uses a progressive tax system, also known as a progressive income tax. Their current tax brackets range from 10% to 37%, and these are marginal tax rates. This means that different rates can apply to different parts of a person's income.

For example, in 2020, a single taxpayer will pay an income tax of 10% on income up to a maximum of $ 9,875. Therefore, income of $ 9,876 to $ 40,125 will be taxed at 12%, while income of $ 40,126 to $ 85,525 will be taxed at 22%. The income tax rate varies up to a maximum income of $ 518,401 for a single taxpayer. At that time, any income exceeding this amount is taxed at 37%.

Since the federal government offers more deductions, including a standard deduction of $ 12,400 for single taxpayers and $ 24,800 for couples who file jointly for 2020, people pay less income tax than they do.

At the state level, taxes are usually calculated differently. Every state income tax is different. While some states base their taxes on a person's federally adjusted gross income, others adjust it with their deductions and credits. Additionally, some states will exclude certain income types, such as social security or government pensions, from their tax calculations.

When it comes to tax rates, some states have a single rate for all revenue, while others use marginal rates in the same way as the federal government. State tax rates typically range from 2% to 13%. Some states, such as Florida, Nevada, and Texas, do not collect income tax.


Local Taxes

Local income tax can be levied by cities, counties, school districts, or other municipalities. However, these local taxes are very low.

Midwestern states and Great Lakes regions are more likely to have local income taxes, and most tax counties are in Ohio and Pennsylvania. Jurisdictions generally apply a single tax rate, which is typically between 1% and 3%. The cities usually charge taxes for everything you get except Social Security.

They may also have taxes on residents and non-residents. Non-residents pay local income tax only on money earned in that municipality, while residents pay tax on all income, regardless of where it is generated. Residents working in another municipality that collects income tax may qualify for a credit for these tax payments.


Should you move to save taxes?

Although overshadowed by federal loans and deductions, there are state tax incentives for businesses and individuals. These can include state income tax credits, Homestead property tax credits, and deductions for college savings or long-term care insurance premiums.

These loans may not exist in the neighboring state. For this reason, the decision to move can be an important part of planning decisions for retirement or relocation.

However, remember that each state has its residency requirements. Buying a second home in another state and changing your driver's license address may not be enough to change your address for tax reasons. Like New York, some states have implemented programs to ensure that people, especially those with high incomes, don't dream about income tax, pretending to live in another state where they are not full-time residents.


FOR MORE INFORMATION ON FEDERAL, STATE & LOCAL TAXES, OR TO CONTACT Taxes Made EZ, Inc., FOR AN APPOINTMENT TO RESOLVE ANY OF YOUR TAX ISSUES, PLEASE CALL US OR CLICK THE BLUE BUTTON BELLOW.


THANKS FOR VISITING.



Taxes Made EZ Inc
Contact Member