20 Jul Lower Your Taxes by Moving
Thinking about the July 15th tax deadline and looking for inspiration for this article I found a plethora of quotes on taxation. One of the more uplifting ones was attributed to the American historian Albert Bushnell Hart, “Taxation is the price which civilized communities pay for the opportunity of remaining civilized.” While we might all agree that the payment of some taxes is necessary and good for society, we would probably also agree that we would like to minimize our personal tax burden. One often-overlooked way to reduce taxes is by changing your state of residency. Although this is frequently thought of in the context of retirement, I would suggest that the state taxation issue should come into play even earlier in one’s career. Analysis of the various taxes, state by state, shows wide discrepancies and opportunities for the tax-savvy person to save money.
“The avoidance of taxes is the only intellectual pursuit that carries any reward” John Maynard Keynes
There are a myriad of rankings available on the internet which show the best and worst states for taxation. To be fair, you need to consider all the different taxes that are applicable: income tax, sales and excise tax, property tax, and estate/inheritance tax. To look at only one tax type can be misleading. If you are still working, it may make sense to begin your analysis with the state income tax rates. The following states have no income tax, but are they overall the cheapest places to live, tax-wise?
No Income Tax:
- South Dakota
- New Hampshire (taxes income from investments but phasing out in 2021)
- Tennessee (taxes dividends and interest only but phasing out in 2025)
Compare these with the top 10 highest income tax states in the country to consider the difference in your net disposable income. Be sure to review the brackets, as some states (like Vermont) have extremely low thresholds to their maximum tax rates.
“The hardest thing in the world to understand is the income tax.” Albert Einstein
State sales and local tax rates varies significantly as well, from a low of zero (in Delaware, Montana, New Hampshire, Oregon) to highs exceeding 9%. While this may not have much of an impact on daily living, the effect is more obvious when purchasing big ticket items like cars. That $50,000 SUV will cost you $4735 more in Tennessee than in New Hampshire! On top of normal sales tax, states also add excise taxes on such items as gasoline, cigarettes, and alcohol. The 10 states with the highest average combined state and local sales tax rates are:
“America is a land of taxation that was founded to avoid taxation.” Laurence J. Peter
One of the more painful taxes that we pay are those on real estate – property taxes. These are a burden, not just for homeowners, but for everyone since property taxes are factored into rent that is paid as well. In general, states in the south and west have lower property taxes than the northeast, but there are exceptions to this rule. We must also factor in the average price of a home and not simply look at the tax rate when making comparisons. For example, although Hawaii has the lowest effective tax rate, it has the highest median home value at $587,700! Here are the best and the worst states with regards to median home value property taxes in that state:
It should be noted that all states offer some property tax exemptions for certain groups of citizens which could lower your tax bill. Veterans, seniors, disabled residents, and low-income homeowners may all qualify for certain deductions. Florida, Arizona, and California offer particularly favorable exemptions to retirees. Many states have a lower tax burden for primary vs. non-primary residents; be sure verify your tax rate particularly if switching from part-time to full-time resident status. In some states you are required to file a homestead exemption to get a discount.
“Philosophy teaches a man that he can’t take it with him; taxes teach him he can’t leave it behind either.” Mignon McLaughlin
Finally, estate and inheritance taxes are factors to consider if you are older and/or wealthy. Although the federal estate tax exemption in 2020 is at an all-time high of $11,580,000, in some states the exemption amount is much lower. In all, twelve states plus the District of Columbia still levy estate taxes with exemption amounts as follows:
“A tax loophole is something that benefits the other guy. If it benefits you, it is tax reform.” Russell B. Long
So, all things considered, which are the most tax-friendly places to live? Looking at income taxes, sales, and excise taxes, property taxes, and estate taxes the following states made the top 10 list. Note that the ranking adjusts for the cost of living in each state.
By contrast, the most 5 most expensive states to live in have average state tax burdens that are double these amounts:
Of course, everyone’s situation is different. One would need to review their individual circumstances to see if such a move would be beneficial to them. For example, if you are a high-income earner, then the state income tax might be of primary concern. However, if you are retired or in a lower tax bracket, then property taxes may be more important. As a CERTIFIED FINANCIAL PLANNER™ I have helped people with this analysis and provided them with the facts needed to make an informed decision on moving. Thinking of making a move? Give us a call.