Calculating State Taxes

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State taxes are taxes that a resident of each state pays from each paycheck. Each state has a different amount of taxes that it collects based on income. Most states base their tax rates income percentiles on federal guidelines given to them. Some people may be curious to know how to calculate the amount of state taxes they are paying annually. This can be calculated fairly easily.

Figuring out Income

The first step to calculating taxes is to understand the difference between gross and net income. Net income is the amount of money a person receives after benefits, taxes, social security etc. is taken out of their paycheck. The amount before net income is called the gross income. If self-employed, a person needs  to record their earnings and spending to figure out how much profit is being made. Self-employed residents have to pay a self-employment tax instead of state tax, this is a different calculation process.

To calculate state tax, gross income is looked at. To find out their exact gross income, a person can look on their paystub or ask whoever houses this information at their place of work (sometimes this is management or HR). Once a person, who is traditionally employed, has their gross income figured out they can then find out what percentile or tax bracket they fall into depending on their state.

Figuring out Taxable Income through State Deductions:

Once an individual figures out their gross income, they need to figure out how much of that income is taxable. Each state has its own deduction rate on net income. Here is an example of what that deduction would look like:

  • For example, if a person’s gross income is $40,000 and their state had a deduction of $3000, their taxable income will be $37,000.

By using this taxable amount, a person can figure out what tax bracket their income will fall into.

Figure Out Your Tax Brackets and Your Tax Credit

As mentioned above, taxes work differently for every state and can change on a yearly basis, this includes the tax brackets and tax credits. A tax bracket breaks down different amounts of income and puts it under a charge for state tax. The higher the income, the more state tax a person typically pays. Tax credits are a credit that a state gives to its residents to use against the total state taxes they will pay, meaning you keep a little extra money.

To get some sort of idea of how tax brackets work here is Alabama’s single 2018 tax bracket:

$0.00+                 2.59%

$10,179.00+        2.88%

$25,445.00+        3.36%

$50,890.00+        4.24%

$152,668.00+      4.54%

  • So if we take the taxable income from above ($37,000), this person would fall into the 36 percentile.

However this does not mean that they would pay 3.36% for all of the $37,000. There are a few more calculations to make.

The Final Step in State Tax Calculation

This is the last step in the process of calculating state taxes. Once a person figures out what category of percentage their taxable income falls into, they can calculate the different increments their gross income is taxed at.

  • So if we take the example above, $37,000 taxed at 3.36%, there is some breaking down to do:
  • Income from $0-$10,179.00 (a difference of $10,179) will be taxed at 2.59% (.0259) which equals $263.63
  • Income from $10,179.00 to $25,445.00 (a difference of $15,266) will be taxed at 2.88% (.0288) which equals $439.66
  • Income from $25,445.00 to $37,000 (a difference of $11,555)  will be taxed at 3.36% (.0336) which equals $388.24

When these amounts ($263.63, $439.66 and $388.24) are added up, the total equals $1091.63.

  • Finally, from $1091.63 subtract the state tax credit, let’s say it is a $100, so

$1091.53-$100.00 = $991.53

$991.53 is the calculated state tax this person is paying for the year

Paying taxes are a way for Americans to contribute to the society they live in. When it comes to paying taxes there are two major ones, federal tax and state tax. Many Americans might be curious about how much state tax they are paying/ have to pay. Both State and federal taxes are based on income. Calculating state tax can be fairly simple, as you can see.

To do so, a person should know their gross income and their state tax information. This information includes: deduction, tax brackets, and tax credit. Once this information is obtained, a person may then accurately calculate what their taxable income is (subtracting the state deduction from their net income). Next, using their taxable income they need to figure out what tax bracket they fall into.

Once the tax bracket is determined, the income should be broken down into increments and taxed by the respective percentage, until they reach their taxable income amount. After the value for each group is added up, the tax credit is subtracted, and this amount is the calculated state tax.

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