Federal income tax
Federal income tax is the tax imposed by the Internal Revenue Service (IRS) on the yearly earnings of taxpayers, corporations, trusts, and other legal entities. Federal income taxes are applied to all forms of income that make up a taxpayer’s taxable income, like wages or capital gains.
Federal income tax is broken down into tax brackets. Each bracket includes a “chunk” of income and is based on the filing status. Taxpayers' taxable income is then taxed based on their bracket. Since the U.S. has a progressive tax rate structure, you will always pay the lower tax rate on all “chunks” of income in the lower brackets than the final amount in the highest bracket for that taxpayer. All of these are added together to provide the taxpayer with their taxes before credits. The taxpayer can also use the tax rate equation for their filing status and their taxable income amount. The equation has the various rates below the highest one factored in.
State income tax vs. federal income tax example
State income taxes are lower than federal income taxes. Mainly because the states also assess various types of property taxes, sales taxes, and even locality taxes in some states. While the federal income tax is the main source of federal income.
However, when you add the tax bites together you can see a large chunk of change going out to the taxing authorities.
For example, if you take a single 40-year-old taxpayer in Pennsylvania with a taxable federal income of $65,000 and a $5,000 401(k) contribution making his or her Social Security, Medicare, and PA income $70,000, you can really see the effect.
- Fed income tax $7,368
- Social Security tax $4,340
- Medicare tax $1,015
- Pennsylvania tax $2,149
While this example makes the state taxes look substantially lower than the federal taxes, remember the state can and does collect taxes in many different ways.
In some cases, individual municipalities may impose their own tax on local taxpayers. These taxes fund local public services ranging from education to garbage collection and sewer maintenance. Local taxes can come in many forms, from property taxes, payroll taxes, and sales taxes. Local taxes can differ from one municipality to the next.