Calculating state income taxes
Federal taxes aren’t the only things taken out of your paycheck. Learn about state income taxes, how to calculate them, and what to expect.
Now let’s figure out how much a single person making $50,000 a year would pay in state income taxes. Assuming they’re in a state that has income taxes. And this right here, 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, a single person. And instead of having a personal exemption, which reduces your taxable income, which is what we saw with 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 that in right, let’s see...drumroll 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 based on our taxable income.
But now we have to factor in this tax credit. And a tax credit as opposed to a deduction. Now 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 a federal level, $1,916 at the state level. So our actually take-home pay. Let’s see, $50,000 is what we’re starting with. We’re going to pay at the federal level $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.
So based on this, we can figure out what an effective tax rate is based on 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’d be taking home $4166 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 $3194.17—a little under $3,200 a month. So you have to plan accordingly.