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. 11 states use this method, as of 2023: Arizona (2.5%), Colorado (4.55%), Idaho (5.8%), Illinois (4.95%), Indiana (3.23%), Kentucky (4.5%), Michigan (4.25%), Mississippi (5.0%), North Carolina (4.75%), Pennsylvania (3.07%), and Utah (4.95%).

State Income Tax vs. Federal Income Tax Example

TConsider 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. 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 just $30 ($600 × 0.05) in state taxes because New Hampshire taxes interest and dividend income only—at the rate of 5%. The taxpayer's effective state tax rate on their total income of $78,000 (tax obligation, $30, divided by taxable income, $78,000) would be 0.038%. If this same person lived in Utah, all of their taxable income—both earned and unearned—would be subject to that state's 4.95% flat tax rate. In that case, their state tax bill would be $3,861 ($78,000 × 0.0495). In terms of federal taxes, under the progressive system, this taxpayer would pay $995 on the first $9,950 of their income (excluding interest) that falls into the 10% tax bracket. They would pay 12% on their income from $9,950 to $40,526 ($3,669.12), and 22% on the amount greater than $40,526 ($7,584.28) for a total federal tax bill of $12,248.40. Their effective federal tax rate would be 16.3%.