State Income Tax Rate Inequality in America.
Let’s face it, as Americans we are not all created equal. This fact is especially pronounced when it comes to paying taxes. Most of us have to pay income taxes, yet the exact amount varies by our income level. Having each individual state impose its own income tax laws does not help this matter either.
The IRS already makes the task of figuring out your income tax liability rather cumbersome: you have to determine your Adjusted Gross Income (AGI), subtract the amount of your deductions (standard or itemized), reduce this number by any personal and dependent exemptions you qualify for; and then hopefully arrive at your Taxable Income amount. After ignoring all of the other possible credits, exceptions and unique tax situations that might or might not apply to you, you can have a lot of fun playing with up to seven tax brackets that correspond to your earnings amount.
I used the Tax Foundation website to retrieve pertinent state income tax information for 2014 tax year to see exactly how individual states add complexity in calculating our tax liability. I specifically wanted to retrieve maximum possible marginal tax rate by state in 2014. Below are my findings.
Most states choose to not follow Federal example when allowing deductions and exemptions. While the Fed allows an exemption of $ 3,950 per qualified dependent, some states effectively discourage starting a family. Six states do not allow any dependent exemptions: Colorado, Connecticut, Michigan, Nebraska, North Carolina, and Pennsylvania. On another hand, Connecticut has a personal exemption of $ 24,000 for Married Filed Jointly filers, most generous of any state, and more generous than Federal Standard Deduction of $ 12,400.
Depending on the state that you call home, you might not owe any additional state income taxes. In fact, seven US states do not collect such tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. Tennessee and New Hampshire are two states that do not collect income tax on earned portion of your income, but make you pay tax on interest and dividends income. Moving to these states while preserving the same amount of income, would yield you an instant pay raise.
There are eight states using a flat income tax rate: Colorado, Illinois, Indiana, Massachusetts, Michigan, North Carolina, Pennsylvania, and Utah. You can thank your legislators for making your life a little bit easier if you reside in these states.
The remaining states adopt their own version of tax brackets. If you think that having seven tax brackets is excessive, consider the fact that California and Missouri have ten tax brackets, while the Aloha state leads the nation with twelve (12!) personal income tax brackets. California boasts the highest maximum possible marginal tax rate of all US states at 13.3%. Hawaii comes second with 11%, followed by a near tie between Oregon (9.9%) and Minnesota (9.85%.)
Unless your state has a flat income tax rate, your effective tax rate will vary from the maximum possible marginal rate. The later rate will only apply to the income level corresponding to the highest tax bracket used by your state. Under the Married Filing Jointly scenario, you earn the bragging rights of being in the highest Federal tax bracket upon reaching Taxable Income of $ 457,600. Less than 2% of Americans reach this 39.6% tax bracket. If you live in Alabama, $6,000 income will make you the highest earner for the purposes of the State Treasury Department. For comparison, Californians would have to report taxable income above $1,000,000 to start paying the above-mentioned 13.3% tax rate. New Yorkers are charged 6.85% on their income above $308,750 level, but enter the highest tax bracket of 8.82% person upon reaching income level of over $2,058,550.
If you feel that you are paying an unfairly high state tax bill, don’t despair, as the states have their ways to collect taxes one way or another. Case in point: while Washington has no income tax, it does have rather steep sales tax, yet neighboring Oregon has no sales tax, albeit a high income tax. Go figure…
Courtesy of Tableau Public I visualized my findings on an interactive map, for your viewing pleasure. Using the red color scale you can see the highest and lowest marginal income tax rates in US states. Feel free to click on the state to visit its Treasury Department for additional information. No local income tax rates were considered in this exercise, amounts were rounded for presentation purposes, various tax phase-outs were overlooked.
Photo credit Jack Weston via Free Photos Bank