When tax season arrives, many people focus solely on their federal tax return while overlooking an equally important piece of the puzzle: state taxes. You’re actually dealing with two separate tax systems that operate independently but share some common ground. Federal taxes apply to everyone in the United States, while state taxes vary dramatically depending on where you live.

Federal Tax Basics

Federal taxes fund national programs like Social Security, Medicare, defense spending, and federal infrastructure. Everyone who earns income in the United States must file federal tax returns if their income exceeds certain thresholds.

The federal tax system uses progressive tax brackets, meaning higher earners pay higher percentages on income above certain levels. For 2025, federal income tax rates range from 10% to 37%.

Federal taxes include income tax, Social Security tax (6.2% up to $168,600 in 2025), and Medicare tax (1.45% on all income, plus an additional 0.9% on high earners).

State Tax Variations

State taxes vary more than any other aspect of the tax system. Nine states currently have no state income tax: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming.

States with income taxes set their own rates, brackets, and rules. California has the highest state income tax rate at 13.3%, while several states keep rates below 5%.

State sales taxes also vary significantly. Delaware, Montana, New Hampshire, and Oregon have no statewide sales tax, while some states combine state and local sales taxes exceeding 10%.

How State and Federal Taxes Interact

The most important interaction involves itemized deductions. You can deduct state and local taxes (SALT) on your federal return, but this deduction is capped at $10,000 annually.

Some states allow you to deduct your federal taxes when calculating state taxes, while others don’t. Tax planning becomes more complex when state and federal rules differ.

State-Specific Considerations

Residency rules determine which state can tax your income. Generally, you owe taxes to your state of residence, but this can become complicated if you move during the year or work in multiple states.

Some states have reciprocity agreements that prevent double taxation for people who live in one state but work in another. Retirement planning is particularly affected by state tax differences.

Multi-State Tax Situations

People who move between states during the tax year must typically file part-year resident returns in both states. This process requires careful allocation of income and deductions between the different time periods and states.

Remote workers may face complex tax situations if they live in one state but work for employers in another. Some states try to tax all income earned by their residents regardless of where the work is performed.

Military personnel and their spouses have special protections under federal law that generally allow them to maintain tax residency in their home state regardless of where they’re stationed.

Planning Strategies

Consider state tax implications when making major life decisions like retirement location, job changes, or investment strategies. The difference between high-tax and no-tax states can represent thousands of dollars annually for many taxpayers.

Timing income and deductions can help optimize both state and federal taxes. For example, bunching deductions in alternate years might help you exceed the standard deduction threshold and maximize the benefit of state tax deductions on your federal return.

Common Misconceptions

Many people incorrectly believe that moving to a no-tax state automatically eliminates all their tax obligations. While you won’t pay state income tax, you’ll still owe federal taxes, and you might face higher sales taxes, property taxes, or other fees.

Some taxpayers think they can avoid state taxes by establishing residency in a no-tax state while continuing to live elsewhere. States actively audit and challenge these arrangements, and the penalties for tax fraud can be severe.

Future Considerations

State tax laws change frequently as states compete for residents and businesses while trying to fund government services. Stay informed about changes in your state’s tax laws, especially if you’re considering major financial decisions.

The increasing prevalence of remote work is creating new challenges and opportunities in state taxation. Understanding both state and federal tax systems helps you make informed decisions about where to live, work, and invest.