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Why doesn't anyone look at the combined federal and [Your State] tax rate, grouped by bracket? Let's say like the Federal + New York tax rates?

Wouldn't this determine the incremental amount of total tax paid per additional dollar of taxable income, and you will be able to see where the biggest jumps in tax rates are? The perfect use case would be finding a ideal amount that you should contribute to a Traditional 401k/IRA to get your taxable amount below that amount.

It just doesn't really make sense to look at federal and state tax brackets separately without combining them together? I can't find any combined graphics anywhere for any state.

Chris W. Rea
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Katsu
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2 Answers2

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You can see all the state rates and brackets at the Tax Foundation website. What you can see is that for the highest income tax states, the brackets actually don't change all that much:

  • CA: 9.3% from 66K to 13.3% from 1M (4% diff in total between brackets)
  • NY: 6% from 80K to 10.9% from 25M (10.3% from 2.5M more relevant - 4.3% diff in total between brackets)
  • HI: 8.25% from 48K to 11% from 200K (2.75% in total between brackets)

list goes on.

Compare that to Federal tax brackets:

  • 35% for incomes over $231,250 ($462,500 for married couples filing jointly);
  • 32% for incomes over $182,100 ($364,200 for married couples filing jointly);
  • 24% for incomes over $95,375 ($190,750 for married couples filing jointly);
  • 22% for incomes over $44,725 ($89,450 for married couples filing jointly);
  • 12% for incomes over $11,000 ($22,000 for married couples filing jointly).

from 22% at 44.7K to 35% at 231K you get 13% difference in total. Over three times more than the CA and NY diffs.

So naturally, people are optimizing for the Federal tax brackets.

littleadv
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Why doesn't anyone look at the combined federal and [Your State] tax rate, grouped by bracket?

I'm certain some people do consider state income tax brackets, but for many people its not a relevant/significant factor when it comes to IRA/401k contribution decisions:

  • 40% of states have either a flat state income tax rate or no income tax.
  • Of the states that do have brackets many have relatively small marginal increases.
  • Higher income individuals have limited pre-tax contribution options (IRA not deductible above certain income) and are more likely to have already exhausted the options they do have.
  • For many people, the decision about IRA/401k contribution amounts hinges on what they can afford to have locked away for retirement vs needing now, so there isn't much flexibility to contribute more.
Hart CO
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