Financial Advice

Why Living in a Different State Could Increase Your Tax Bill

It can be painful to look at the income tax deductions on your pay stubs, especially if you hear about a friend or family member who doesn’t seem as burdened by them. That’s because, as you may have realized by now, taxes are charged by several different entities: federal, state and local governments. So you will pay a different amount of income, payroll, property, estate, sales and capital gains taxes depending on where you live. To learn more about the different income tax systems by state, you can look into the main characteristics that distinguish the costs.

Progressive vs. Flat Taxes

Most states apply taxes progressively, as the federal government does. This means your tax rate increases as your income increases. However, some states, like Colorado, use a flat tax system where all citizens pay the same percentage of income tax to the state regardless of income. Some states don’t collect any income tax and charge a flat tax rate for interest and dividend income.

Marginal vs. Effective Rates

Understanding your tax rate goes behind whether it is progressive and flat. Effective rates are your total tax obligation relative to income. You can figure this out by dividing how much you pay in income taxes by your income. Marginal tax rates measure the percentage of tax applied to your income for each tax bracket. For example, when it comes to federal taxes, if you file as a single person you will pay 10% on the first $9,225 you make but 15% on the next $28,225.

Assessing your effective rate can show you how much you will have to pay in taxes and you can use this to compare to other people, whereas marginal rates can help you choose filing strategies that will best suit your situation and needs.

Credits

Different states also allow for different credits that will reduce your income taxes by the full amount of the credit. For example, New York offers a college tuition credit and California has a credit for the purchase of an electric vehicle. Depending on your saving and spending behavior as well as lifestyle factors, you can receive different incentives to subtract from the total you owe. You may be able to save big by looking into which credits you qualify not only federally, but also with your state.

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This article originally appeared on Credit.com.

This article by AJ Smith was distributed by the Personal Finance Syndication Network.

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