Federal and State Taxes

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Federal and State Taxes

Federal tax rates vary depending on your filing status. The most favorable tax status is married filing jointly or qualifying widow or widower, followed by head of household (a separated, divorced, or single person who resides with one or more dependents), single, and then married filing separately. Married persons can either file jointly or separately. Taxpayers can claim head of household status if they have one or more qualified dependents living with them during the tax year. Dependents can include minor children, dependent elderly or disabled relatives, or other relatives or non-relatives who meet IRS dependency tests. Qualifying widows and widowers can claim married filing jointly status in the two years following the death of their spouse, provided they are unmarried during the tax year and have a child, adopted child, or stepchild they can claim as a dependent. Single status applies to taxpayers who are unmarried and have no dependents.

Married filing jointly

Generally, married filing jointly tends to be the most favorable filing status, though in certain cases married persons pay higher taxes than single persons with the same income and deductions. Head of household is in most cases the second most favorable filing status, followed by single and then by married filing separately. For each filing status, there are these brackets: 10, 12, 22, 24, 32, 35, and 37 percent. Under certain circumstances, the alternative minimum tax could result in a higher effective tax bracket, but this tax is not generally considered in filling out a W-4 form but is a separate calculation you might have to make on your yearly federal income tax form.

Getting started with the W-4

When you begin employment and at certain times thereafter, you fill out a federal Form W-4 withholding form, which is provided by your employer. Prior to the new tax law in 2018, you would also state the number of withholding allowances you wished to claim; these were the personal exemptions you took, and they reduced your taxable income. The new tax law eliminates exemptions, though it also raises the standard deduction. Your employer uses your W-4 form to determine what percentage of federal and state income taxes to withhold from your paycheck.

How employers withhold

When determining payroll tax rates for federal income taxes, employers use tax tables provided by the Internal Revenue Service, found in Publication 15, Employer’s Tax Guide. Based on the employee’s filing status, how often the employer pays employees—weekly, biweekly, semimonthly, monthly, quarterly, semiannual or annual—their income and number of withholding allowances, the employer withholds a certain amount of money per pay period to pay the employees.

How state taxes work

States that levy an income tax may set a flat rate or rates based on the amount of income you earn, as do local governments that levy an income tax. For both local and state income taxes, you generally pay tax on your compensation income based on the state and locality where you work, rather than where you live. To avoid double taxation, you are generally given a credit for the state and/or local government where you paid the tax so you do not have to pay extra taxes where you live in addition to those you paid in the locality and state where you work.