State and local income tax withholding is the portion of income the state or local government withholds from your paycheck. Not every state or local government assesses an income tax so there is no general rule for how such a tax is administered. Some states such as Michigan have a flat state income tax (4.35%) while others use a graduated scale similar to the federal government. For states that use the graduated scale the logic used when calculating your state withholding is the same as calculating your federal withholding (reference: Federal Income Tax Withholding)
State income tax withholding is based upon your taxable income. The definition of taxable income on the state level can seem confusing because each state has its own regulations outlining what constitutes taxable income, and there is a chance it will differ from federal taxable income. In reality determining state taxable income is just as simple as calculating it on the federal level, take gross income and subtract any allowances or dedications permitted by the state, for example, some states allow any payments to a state college tuition fund to be deducted.
Since the laws regarding state income tax vary so widely across the US I will post general information below and some useful links for those who would like a more in depth look at a specific tax rates and information by state.
The lucky ones! States with no individual income tax (states in red tax interest and dividends)
- New Hampshire
- South Dakota
States with a flat individual income tax rate
- Colorado – 4.63%
- Illinois – 5%
- Indiana – 3.4%
- Massachusetts – 5.3%
- Michigan – 4.35%
- Pennsylvania – 3.07%
- Utah – 5%
All other states not listed use a graduated scale, reference links below for details.
The top link this is a great compilation of every state’s individual income tax rates for the years 2000 – 2011, also the key at the bottom is helpful in determining if your state has any special circumstances. The bottom link is an interactive map, just click on your state to see income, property, estate, and other tax rates.
Unfortunately, I could not find a complete list of all local tax rates by state for 2011, but below is a link that shows local tax rates by state from 2008. The link can be useful to see if your city levies a local tax but, be cautious, there has probably been many changes made to the tax code since then. If you are interested in knowing if your local government assesses an income tax I would recommend checking your city or county website.
Some important notes:
Tax law can change frequently, the percentages shown here are for 2011 only (2008 for local), however, the logic behind the calculations tends to remain constant, a quick Google search should provide the latest tax rates.
Taxes withheld from your paycheck do not necessarily equate with taxes paid. If you usually get a refund this is because more tax was withheld during the year than what you owed and vice versa, if you owed money not enough tax was withheld.
I am not a tax accountant; this post is only meant to be a quick informative overview of state and local income taxes covering the basics. For detailed questions or concerns please consult a tax professional.