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Calculating state income taxes

Not every state has income tax—but if your state does, learning how to calculate it will help you plan better.

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Now let’s figure out how much the single person making $50,000 a year would pay in state income taxes. Assuming that they’re in a state that has income taxes. And this right here are the current tax brackets for my state. And every state will have different income tax brackets, and they are likely to change year after year. But the important thing to take away is how all of this is calculated.

So at the state level, you still get—at least in the state I’m in—there is a standard deduction. That’s $3,769 for a single filer, for a single person. And instead of having a personal exemption, which reduces your taxable income, which is what we saw at the federal level, they have a tax credit—a personal tax credit. Which essentially is just a credit on your taxes. So this doesn’t reduce your taxable income; this can actually be used against the actual taxes that you owe.

So first, let’s think about what our taxable income is in my state. So I’m starting with $50,000. $50,000 is my gross income. And then I have a standard deduction in my state. The standard deduction in my state of $3,769. Gets me to taxable income in my state of $46,231. Now if you look at these brackets, it looks like we’re falling into this 8% bracket right over here. But just as we said in the federal example, that does not mean we pay 8% on all $46,231. It means we only pay the 8% on the increment above $37,005. For the rest of the brackets we pay 1% on the first $7,124.2% on the increment up to $16,980. So on and so forth.

So let’s calculate what that is. So we are going to pay 1% on the first $7,124. Then to that, we’re going to pay 2% on the increment up to $16,980. And that increment is $16,980 minus $7,124. And then, we’re going to pay 4% on the increment up to $26,657. So it’s that number minus $16,890. And then, we’re going to pay 6% on the increment up to $37,005. So that’s $37,005 minus $26,657. And then, we’re in the home stretch here, we're going to pay 8% on the increment above $37,005. So our taxable income, we already saw is $46,231. So it’s $46,231 minus $37,005. Brings us to… Did I type all that in right? Let’s see... Times 1%, and then we have 2% times… yep that looks right, and then we have 4%. I want to make sure I’m typing all of this in correctly. And then $37,000 minus $26,657, and then that 6% and then 8% on that last increment… Drum roll please… We get to $2,018, just based on the brackets right over here. So at the state level, it looks like we have $2,018 just based on our taxable income.

But now we have to factor in this tax credit. And a tax credit as opposed to a deduction. Remember, a deduction or an exemption reduces your taxable income. A credit goes directly against your taxes.

So we were going to pay $2,018, but we get a credit of $102, which gets us to $1,916 in state taxes. So our total taxes, $9,754 at the federal level, $1,916 at the state level. And so our actual take-home pay is going to be, let’s see, $50,000 is what we’re starting with. We’re going to pay at the federal level. I actually already figured out in our last video what we’re left with. But at the federal level we’re going to start off paying $9,754. Then at the state level we’re going to pay $1,916. Getting us to $38,330 take-home pay.

$38,330 is what I’m actually going to be able to spend. And so based on this, we can figure out what an effective tax rate is based on both the federal and state income tax. So if we look at that as a fraction of our original income, $50,000, we are left with 76.6% or another way of thinking about it is roughly 23.4% or 23.3% of your income gets taken for taxes. That is your effective tax rate. And we’re including both federal plus state.

Just look at the number again; you’re keeping 76.6%, so you’re paying 23.34%. Approximately 23%. If you want to look at this on a monthly basis: at $50,000 you thought that you would be taking home $4,166 a month, but now you’re actually going to be taking home $38,330 divided by 12. You’re only going to bring home about $3,194.17, a little under $3,200 a month. So you have to plan accordingly.

Remember, this video is for information purposes only, and is not tax advice. Bank of America doesn’t provide tax advice. Contact a tax advisor to understand how the information in this video may apply to your circumstances. Any information included in this video is not intended or written to be used, and cannot be used, by any recipient to avoid any penalties that may be imposed upon such recipient by the Internal Revenue Service.

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The material provided on this Website is for informational use only and is not intended for financial or investment advice. Bank of America and/or its partners assume no liability for any loss or damage resulting from one's reliance on the material provided. Please also note that such material is not updated regularly and that some of the information may not therefore be current. Consult with your own financial professional when making decisions regarding your financial or investment management. Any U.S. federal tax information included in this communication was not intended or written to be used, and cannot be used, for the purpose of avoiding U.S. federal tax penalties. Neither Bank of America nor any of its affiliates provide legal, tax or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.

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