You owe federal income tax wherever you live. But your overall tax burden can vary dramatically depending on where you live. Read on to learn more.
There are many factors which enter into your decision of where to live or retire. You may want to move to be closer to your grandchildren. You may want to be in the climate you prefer. One of the factors to include in your decision is taxation. As long as you live in the United States, you will be subject to federal income taxation. In fact, even if you live overseas, if you are a U.S. Citizen or green cardholder, you’ll be subject to federal taxes. But that doesn’t mean you cannot lower your tax burden.
Federal income taxes aren’t the only consideration when it comes to taxes. There are also state income taxes. State income taxes vary widely.
- Seven states don’t have an income tax at all: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming.
- Two states tax investment income but don’t tax other income: New Hampshire and Tennessee.
- 41 states and the District of Columbia have a state income tax. The highest tax rate in those states varies dramatically from 2.9% in North Dakota to 13.3% in California.
- Most states exempt social security from state income taxation. Here’s a link to an article setting forth which states exempt social security from state income taxation.
Some cities, counties, or other local jurisdictions have an income tax or the equivalent, as well. For example, St. Louis has an earnings tax of 1%, Detroit has an income tax of 2.4%, and New York City has an income tax of up to 3.648%. Those city taxes are on top of the state income taxes.
Income taxes are not the only state and local taxes. Property taxes vary widely, too. The effective rate of real estate tax varies from .27% in Hawaii to 2.44% in New Jersey. The annual property taxes on a median value home in the state varies from $558 in Alabama to $7,840 in New Jersey. Here’s a link to an analysis of property taxes.
Sales tax also varies widely. Delaware, Montana, New Hampshire, and Oregon have no sales tax. The highest sales taxes are in Alabama, Arkansas, Illinois, Louisiana, Tennessee, and Washington. In those states, the combined state and local sales taxes top 9%. Here’s a link to a survey of state and local sales tax.
Prior to 2018, state and local taxes were deductible from your federal income taxes without limit. Due to the Tax Cuts and Jobs Act, state and local taxes, including income, sales, and property taxes, may only be deducted from your federal income taxes up to $10,000 and then only if you itemize your deductions. While the $10,000 cap on deductibility may not impact the average resident in some states, the average resident in states with high state income and property taxes will definitely feel the pinch of the $10,000 cap.
State and local taxes are one of the many considerations when choosing where to call home.
Stephen C. Hartnett, J.D., LL.M.
Director of Education
American Academy of Estate Planning Attorneys, Inc.
9444 Balboa Avenue, Suite 300
San Diego, California 92123
Phone: (858) 453-2128