Is Your State Taxing You to Death?
As I told you on Tuesday, I’ve been doing my own taxes for the last couple decades. And over that time, I’ve also done my fair share of moving around.
The end result is that I’ve learned first hand what a difference various state tax systems can make to someone’s overall financial picture.
For example, when my wife and I lived in New York City, we suffered under aggressive state – and city! – tax rates.
Then, after we moved to Palm Beach County, Florida in 2006, we no longer had to pay any state taxes at all.
That was like getting an automatic pay raise!
As another comparison…
Pennsylvania, where I was born, levies a flat 3.07% on all personal income. That’s the lowest absolute rate of any state with a personal income tax as well as the least onerous top marginal rate in the U.S.
My current home state of California?
It has a top marginal rate that stretches all the way to 13.3%.
That’s as much as 10% more of my income disappearing every year!
It really is pretty amazing how far apart various states are in terms of personal income tax rates, and money-minded folks would be wise to pay attention to how these variables affect their ability to accumulate wealth.
Besides Florida… Alaska, Texas, Washington, Nevada, Wyoming, and South Dakota are also income-tax-free states.
Tennessee and New Hampshire only tax interest and dividends.
Meanwhile, in addition to the high top marginal rates in California (13.3%) and New York (8.82%), other high-tax states include New Jersey (8.9%), Oregon (9.9%), Minnesota (9.85%), Iowa (8.98%), and Vermont (8.95%).
Our nation’s capital has an equally-high top marginal rate of 8.95%, which might make commuting in from Virginia (5.75%) worth the hassle.
And consider the “small wonder” of Delaware, where my wife was born.
The state is celebrated for its low property taxes and lack of a sales tax. Yet, it also carries a top personal income tax rate that is more than twice its neighbor Pennsylvania’s!
For retirees and near-retirees, it’s equally important to understand how different locations treat various sources of retirement income … along with other policies that greatly impact your financial well-being.
This is especially true since retirees often have more flexibility when it comes to where they live.
If you’re on the East Coast, choosing a lower-cost home state may not require a cross-country move or abandoning friends and family – 20 or 30 miles can make a huge difference. And even in more extreme cases, $5,000 or $10,000 buys a lot of plane tickets every year!
It will probably come as no surprise that most of the same tax-heavy places mentioned above are equally punishing to retirees.
But that’s just a high-level view. You should really dig deeper to find out how various rules will affect you personally.
For example, did you know that some states tax Social Security benefits, especially for higher-income retirees?
Six states currently follow the same method used at the federal level, and seven more have their own special methods.
Just as an illustration, Connecticut begins taxing benefits if a couple makes more than $60,000 a year in retirement income.
If you have a pension or other private source of retirement funds, there’s even more to consider…
Mississippi doesn’t tax any retirement income at all, whether it comes from a pension or a 401(k).
New Hampshire and Tennessee also exempt all retirement income except dividends and interest, plus they offer additional breaks on even those two sources for seniors.
Most other states exempt at least a portion of retirement income from income taxation, too, but the rules vary a great deal. To make things even more complicated, they often treat government pensions differently than private ones. They may also give favorable treatment to pensions that were earned working in-state.
Another popular approach is exempting a certain amount of retirement income from taxation, though again, the amounts vary a great deal. Georgia gives anyone 65 or older up to $65,000 or $130,000 per married couple.
And even the “no income tax” states have other variables you need to think about…
You might have more onerous property taxes or high sales taxes.
If you plan on leaving anything to heirs, there are also possible estate and inheritance taxes to consider.
Just in case you’re wondering, an estate tax applies to all of a deceased person’s assets that exceed any predetermined limits or deductions. In contrast, an inheritance tax reduces the value of assets passed along to certain designated categories of people.
In Pennsylvania, for example, there is no state estate tax. However, there IS an inheritance tax that hits lineal heirs (21 or older) at 4.5%, 12% for siblings, and as much as 15% for everyone else but surviving spouses, charitable organizations, and other exempt institutions.
Meanwhile, both New Jersey and Maryland have estate taxes AND inheritance taxes!
So the message is clear: If you care about making and keeping as much money as possible, it pays to think about where you live as well as where you’ll die.
To a richer life,
Editor The Rich Life Roadmap