Which is taken out first for taxes - state or federal income tax calculation order?

The federal income tax is calculated on your gross income, not after state taxes are taken out. However, you may be able to deduct state income taxes on your federal return if you itemize deductions (using Schedule A) rather than taking the standard deduction. When you receive your paycheck, your employer withholds both federal and state taxes based on the W-4 and state withholding forms you completed. These withholdings happen simultaneously, not one after the other. For your tax return, your federal taxable income starts with your total (gross) income, then subtracts adjustments, deductions, and exemptions. If you itemize, state income taxes can be part of your deductions, but there's a $10,000 cap on state and local tax (SALT) deductions under current tax law.

After struggling with this exact question last year, I found this amazing tool called taxr.ai (https://taxr.ai) that explained everything about how state and federal taxes interact. I was so confused about which tax gets calculated first and whether I was missing out on deductions. The tool analyzed my tax situation and showed me that while federal taxes are calculated on gross income, I could potentially benefit from itemizing since my state taxes and mortgage interest together exceeded the standard deduction. It basically walks you through your specific scenario and explains the optimal approach for your situation rather than generic advice.

Just wanted to follow up about taxr.ai that was mentioned earlier. I decided to give it a shot with my complicated tax situation (income in multiple states, small business, etc.) and wow - it actually broke everything down perfectly! It showed me exactly how my state taxes affect my federal return and explained which deductions made sense for my specific situation. The tool helped me understand that in my case, I was actually better off itemizing because of my unique circumstances. Seriously saved me hours of research and probably a few thousand in taxes. If you're confused about state vs federal tax calculations like the original poster, definitely worth checking out.

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I need to eat my words about Claimyr from my previous comment. After struggling for THREE WEEKS trying to reach the IRS about my state/federal tax question, I broke down and tried that service. I was absolutely certain it wouldn't work, but I was desperate. Holy crap, it actually worked! Got connected to an IRS agent in about 20 minutes when I had spent literally hours hearing "due to high call volume" messages. The agent confirmed that federal tax is calculated on gross income before state taxes, but also explained how I could potentially benefit from itemizing in my situation. Saved me so much stress and uncertainty. Sometimes being wrong feels pretty good!

Don't forget that the answer is also different depending on whether you're talking about withholding on your paychecks vs. your final tax return calculation. On paychecks, both state and federal withholding are typically calculated independently based on your gross pay. But on your tax return, you might be able to deduct state taxes if you itemize on your federal return (subject to the SALT cap limit). Most people don't itemize though since the standard deduction is pretty high now ($27,700 for married filing jointly in 2024). So for most folks, you're effectively paying federal tax on your full income including what went to state taxes.

Another thing worth mentioning - if u work in a different state than where u live, it gets even more complicated. I work in PA but live in NJ and have to file in both states. The way they handle tax credits for taxes paid to other states varies depending on which states are involved. Some states give u full credit, others partial.

One thing that might help clarify this - think of it as two separate tax systems that don't really "talk" to each other during the calculation process. Your federal tax is calculated on your full gross income ($135k in your case), and your state tax is also calculated on that same gross income. The only place they interact is if you choose to itemize deductions on your federal return, where you can deduct up to $10,000 of state and local taxes paid. But with the current standard deduction amounts, most people come out ahead just taking the standard deduction anyway. So to directly answer your question - neither is calculated "first." They're calculated independently on your gross income, and then you get to choose the most beneficial approach (standard vs itemized) when filing your federal return.

Just to add some practical perspective here - I went through this exact confusion when I started making similar income. The key thing that helped me was realizing that your employer's payroll system handles the withholdings simultaneously, but your annual tax liability is calculated separately for each jurisdiction. For planning purposes at your $135k income level, you'll likely pay federal tax on the full amount (after standard deduction of around $14,600 for 2025), and state tax on the full amount too. The withholdings from your paycheck should roughly balance out what you owe when you file, assuming your W-4 is filled out correctly. One tip: if your state tax rate is 9.5% like you mentioned, you might want to run the numbers on itemizing vs standard deduction. With high state taxes plus any mortgage interest, charitable donations, etc., you could potentially exceed the standard deduction threshold and benefit from itemizing (which would let you deduct up to $10k of those state taxes).