lettered dice spelling “tax season” with pencils and a calculator on a black background

Federal vs. State Tax Return

The United States has a progressive tax system, meaning most taxpayers are required to pay taxes to each level of the government. Therefore, you are required by law to file a tax return for the federal, state and local governments you reside within. While federal and state income taxes have a pre-set tax level that employees within the state must pay, the rates differ significantly between state and federal levels, and tax credits and deductions differ.

While you may know that you owe taxes, it’s helpful to learn more about the progressive tax system and the differences between state and federal income taxes before filing your federal and state returns. The best way to capitalize on your tax return is by learning about state rules and federal credits.

What is Federal Income Tax?

Federal income tax is regulated by the IRS (Internal Revenue Service) on behalf of the federal government. All taxpayers, trusts, legal entities and corporations are required to pay federal incomes, which are calculated based on what is deemed taxable income. This can be wages, capital gains, inheritance and more. Federal taxes are used to pay for federal government services and programs.

Federal income tax rates rely on income tax brackets to determine what you owe when tax season comes around. Federal taxes also allow you several options when it comes to deductions. Taxpayers have the option to take either a standard deduction or to itemize their deductions. Most taxpayers take the standard deduction, but in some special situations, it is wiser to itemize a return. This usually pertains to those who own a business or are self-employed.

What is State Income Tax?

State income tax, on the other hand, is based on income that was earned within the state. This means that you are responsible for paying Virginia taxes for any income you earned while working within the state of Virginia. All tax money gathered at the state level is used to fund state-based programs. 

State income tax laws can get confusing because taxpayers can earn income from several states. Taxpayers are required to pay taxes for each state within which they earn income. Traditionally this only affected people who moved from one state to the next, but as remote work opportunities grow, this can create a complicated state tax return. It is worth noting that your current state of residence can tax the entirety of your income. Tax planning services can help assist you with determining your exact tax rate.

Virginia utilizes a progressive tax system which means that your earned income affects your tax rate. There are, however, fewer tax brackets at the state level. Within Virginia, income tax rates are set at 2%, 3%, 5%, and 5.75%. Tax brackets are based on income and overall residency status within the state. In terms of state tax, Virginia is a great place to live as its tax rate is considered the 11th lowest in the United States. 

Main Differences Between Federal Income Tax and State Income Tax

income tax papers with a magnifying glass, calculator and marker

One way in which state and federal taxes differ is when determining what type of income is taxable. Federal tax code allows pensions and social security to be taxable, while some states exempt these. Virginia does not place a tax on any Social Security benefits. Therefore, all Virginia residents can subtract their Social Security income from their final total when they submit it on their state tax return. This is one significant difference for a large population of residents who pay federal income taxes and state taxes in Virginia.

Federal income taxes differ in that they are usually higher since they support both federal and state governments, whereas state income tax solely supports the state level. While both utilize the progressive tax rate structure, the state tax brackets of Virginia are smaller, and filing status is simpler. Seven states do not have state taxes, but it should be noted that other taxes within those states, such as property taxes and retail taxes, tend to be higher.

If you are searching for tax minimization strategies for your federal and state taxes, contact TPI Group today!