What is the difference between federal and state income tax?

Federal income tax is collected by the IRS on income earned anywhere in the United States and uses 7 progressive brackets in 2026 (10%, 12%, 22%, 24%, 32%, 35%, 37%). State income tax is collected by your state revenue department and varies dramatically: 9 states (AK, FL, NV, NH, SD, TN, TX, WA, WY) have NO state income tax, 12 states use a flat rate (e.g., 4.4% Colorado, 4.55% Illinois — wait, Illinois flat 4.95%; Massachusetts 5.00%, Pennsylvania 3.07%), and 30 states plus DC use progressive brackets with top rates ranging from 2.9% (North Dakota) to 13.3% (California).

Do I pay federal AND state income tax on the same income?

Yes, both apply to the same income simultaneously — your earnings are taxed twice (or more, with local). Each tax jurisdiction calculates its own tax on the SAME taxable income (with its own deductions and adjustments). For example, $100,000 wages in California: federal tax ~$15,300, California state tax ~$5,800, FICA payroll ~$7,650 = ~$28,750 total tax (28.8% effective). Same $100K in Texas: federal $15,300, state $0, FICA $7,650 = $22,950 (22.9%).

Are federal and state tax deductions the same?

No, deductions vary. Federal 2026 standard deduction is $15,000 single / $30,000 married. States have their own: California $5,540 single / $11,080 MFJ; New York $8,000 / $16,050; Illinois has NO standard deduction (flat tax structure); Pennsylvania has NO standard deduction (flat 3.07% tax). Some itemized deductions are federal-only (e.g., the SALT cap is federal). Many states "decouple" from federal changes — for example, California still allows full mortgage interest deduction and does not honor the federal $750K cap.

How does the SALT deduction interact with federal vs state taxes?

The State and Local Tax (SALT) deduction allows you to deduct state income tax (or state sales tax in no-income-tax states) plus property tax from your FEDERAL taxable income — but capped at $10,000/year ($5,000 if married filing separately) under the 2017 TCJA. The cap is set to expire after tax year 2025 unless Congress extends it. For high-tax states (CA, NY, NJ, MD), this cap raised effective federal tax for many high-income filers. Note: SALT only matters if you itemize on your federal return.

Which states have no income tax in 2026?

Nine states have NO state income tax for 2026: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, Wyoming. New Hampshire phased out its 5% interest/dividends tax (Tax Year 2024 was the last). Washington has a 7% tax on long-term capital gains over $250K (enacted 2022, upheld by the Washington Supreme Court 2023). Tennessee fully eliminated its 1% Hall Tax on interest and dividends in 2021.

Do I file separate federal and state tax returns?

Yes. You file Form 1040 with the IRS for federal, and your state-specific form (e.g., California Form 540, New York Form IT-201, Illinois Form IL-1040) with your state revenue department. Most states require you to file your federal return FIRST because state forms reference federal AGI as the starting point. Most tax software (TurboTax, H&R Block, FreeTaxUSA) auto-populates state forms from federal data.

What is a state tax reciprocity agreement?

Reciprocity agreements between certain states let residents of one state work in another and pay state income tax ONLY in their home state. For example: Pennsylvania has reciprocity with NJ, OH, IN, MD, VA, WV — a Pennsylvania resident working in New Jersey pays PA tax (3.07%) instead of NJ tax (up to 10.75%). Without reciprocity, you would pay tax to BOTH states then claim a credit on your home-state return. Major reciprocity pairs in 2026: PA-NJ, PA-OH, PA-IN, IL-IA, IL-WI, IL-KY, MD-DC, VA-WV, KY-IN, KY-OH, MN-ND, MI-OH, IN-OH, MI-IN.

How does Illinois income tax compare to federal?

Illinois uses a flat 4.95% state income tax rate on all taxable income (no brackets) — quite different from the federal 7-bracket progressive system (10%-37%). Illinois has NO standard deduction but allows a $2,775 personal exemption per taxpayer plus dependents (2026). Illinois does NOT allow itemized deductions like federal does. Result: Illinois calculates state tax on essentially gross income minus exemption, while federal allows much larger deductions. A $100K Illinois single filer pays roughly $4,800 state + $15,300 federal = $20,100 total income tax (excluding FICA).

Why are state and federal tax brackets different?

States set their own tax policy — bracket counts, rates, and thresholds reflect each state legislature's priorities. Federal brackets are set by Congress in the Internal Revenue Code and adjusted annually by the IRS for inflation. State brackets often: (a) have fewer steps than federal (e.g., Pennsylvania flat 3.07%; California has 9 brackets), (b) have lower thresholds and start applying at lower incomes, (c) apply different inflation-adjustment formulas, and (d) may not adjust at all (Connecticut hasn't indexed brackets in years, creating "bracket creep"). Some states (CA, NY, NJ, OR) impose a millionaire surtax on income over $1M.

Federal vs State Income Tax 2026: 7 Brackets vs 51 Systems Compared

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