Every year at tax time you’ll pay federal income taxes, state taxes and local taxes. Some states are known for being more tax-friendly than others. Maybe you don’t mind paying higher taxes if it means safer streets, better schools and more modern infrastructure. Still, if you’re planning to move or buy a home, consider the impact of state taxes.
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Would you rather live in a low-tax state or a high-tax state? Of course, all things being equal, most of us would prefer to pay low taxes. However, high-tax states offer some compelling perks. What about the different kinds of taxation? Are higher property taxes worth it to live in a place with no state income tax? What about higher sales taxes? It may be that none of the 50 states has a tax regime that perfectly matches your wishes, but with a little research you can probably come close.
State Income Tax Rates
In most states, personal income taxes play an important role in revenue generation. State income tax rates range from 0% (see below) to 13.3% in California. That 13.3% is only for filers with a million dollars or more in income, but still. Other states with high income tax include Oregon, Minnesota, New York, Vermont, Maine, New Jersey and Iowa. Washington, D.C. also levies high income taxes. If you’re a high earner, you may want to think twice about moving to a high-tax state.
States with No Income Tax
Believe it or not, a handful of states don’t levy incomes tax at all. The states with no income tax are Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming. New Hampshire and Tennessee tax dividends and interest income, but not wage income. If you’re considering moving to another state to retire you may want to consider a place with no state income tax. Can so many Floridians be wrong?
Any state tax comparison has to look beyond income tax. The states with the lowest taxes are particularly tax-friendly states for retirees on fixed incomes. If you want to be sure that your Social Security benefits will stretch, consider moving to a state with lower taxes, and avoid states that tax Social Security income.
Related Article: The Lowest Taxes in America
When You Live and Work in Two Different States
Things get a little more complicated if the state where you claim your residency is not the same as the state where you earn your income. Say you work in a state with no income tax. You may think that exempts you from paying state income taxes. Not so fast. If you’re a resident of a state with an income tax you will have to pay it, even if you earned the money in a state without an income tax.
What about if you live in a state with no income tax but work in a state that has an income tax? In that case, you’ll have to pay taxes to the state where you work. If you earn income in a state you don’t call home you’ll need to file a nonresident return to pay state taxes. The exception is if the state where you live and the state where you work have a reciprocal agreement for tax purposes.
With a reciprocal agreement, two states get together and decide not to tax people who live in one state and work in another. If you live in New Jersey but work in Pennsylvania, (two states that have reciprocity) you can ask your Pennsylvania employer not to withhold Pennsylvania income taxes from your wages. Score! Instead, you can ask your employer to withhold New Jersey taxes.
Taking advantage of reciprocity is not automatic. It’s your responsibility to look up reciprocal agreements for which you might be eligible, and to file the paperwork necessary to change your withholding. If you don’t file an exemption with your employer to let him or her know that you’re taking advantage of a reciprocal agreement, you’ll need to file a nonresident return in the state where you work and then wait to have the withheld money refunded to you. Likewise, if your employer withheld state income taxes from your paycheck by mistake you’ll need to file a nonresident return to be eligible for a refund.
Related Article: All About Payroll Taxes
Along with job opportunities and quality of life, taxes are an important part of what makes a state a desirable destination. If you’re planning a move you’ll want to take income taxes, sales taxes and property taxes into account before you commit to a new state. Many people assume that the mortgage interest tax deduction will lower their tax bill substantially. However, when you add in property taxes, becoming a homeowner won’t necessarily slash your tax liability. It pays to run the numbers.
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