Following on from last week’s post, I’ve continued calculating the income tax that an early retiree (what I like to call “Jailbroken”, in a financial sense) who brings in $37,000 in investment income (interest, dividends, capital gains) would expect to pay to the various U.S. states. As a reminder, the specific assumptions about income that I made are:
- Ordinary dividends: $20,000, of which 80% ($16,000) are qualified dividends
- Taxable interest: $3,500
- Tax-exempt interest: $1,500
- Capital gains on sale of stock: $12,000
For the most part (but not always), states don’t care where the money came from (it’s all just income), so the total income here is $37,000. This should give a $50,000 lifestyle if the capital gains come from sale of stock whose value has roughly doubled since purchase.
As far as details go, I used the married-filing-jointly status, with one child, because that’s me. I didn’t account for any situation-specific tax credits in any state, because I don’t qualify for any and that would just muddle the comparison. Your mileage may vary.
The new additions to the table below complete all states along the Eastern seaboard and the Gulf coast. The results already included all of the Mountain west. What remains to be done is mostly the midwest, which will come next.
No state has yet tied California’s exemplary performance (of zero tax liability); in fact, the lowest-tax addition to the table is in fourth place (Connecticut). Step across the border to Massachusetts, though, and you enter the highest-tax state that I’ve yet encountered. Step across the border again to Rhode Island, and you fall back into the sixth-lowest tax liability in the table.
This border-stepping difference is a common theme, actually. Living in North Carolina would cost about $1,000 in taxes; hop over to South Carolina and owe only $400.
The wealth of states doesn’t help much in explaining the differences. Arizona and Alabama, for example, rank 44th and 45th in terms of GDP per capita; but their tax liabilities are different by $1,000, enough to put them at opposite ends of the cost spectrum. Similar politics doesn’t necessarily mean similar tax structures; California and Massachusetts would seem to be equally blue states, to recite a stereotype. They are at the top and the bottom of the table.
I’ll save any further commentary for the next installment, when I’ve finished calculating the taxes in the rest of the country. I’ll just repeat here what I said before: state taxes are one small component of the cost of living in any given state, with other significant components being property and sales taxes, general costs of necessities like groceries and fuel, differing necessities like heating oil in the northeast vs air conditioning in the southwest…so it would be unwise to base any decisions about where to relocate based only on the income tax numbers.
Also, to repeat: I’m no accountant, I’m just decent at following instructions. And the results below are provided only for entertainment value (oh, so entertaining!).
|Federal||$0||Thanks to the 0% tax rate on qualified dividends for low-income earners|
|Alaska||N/A||No personal income tax|
|Florida||N/A||No personal income tax|
|Nevada||N/A||No personal income tax|
|South Dakota||N/A||No personal income tax|
|Texas||N/A||No personal income tax|
|Washington||N/A||No personal income tax|
|Wyoming||N/A||No personal income tax|
|California||$0||Progressive with fairly large personal and child credits|
|Maine||$130||Generous deductions and exemptions but high rate (starting at 5.8%)|
|Connecticut||$254||Generous deductions and exemptions for joint filers; could be up to $200 lower with a property tax credit, if a homeowner|
|Vermont||$352||Low rate (3.5%) with all federal deductions/exemptions.|
|Rhode Island||$355||Generous deductions and exemptions and low rate|
|South Carolina||$385||Relatively low rates on Federal taxable income, so Federal deductions/exemptions apply|
|Arizona||$394||Low rates and good deductions/exemptions|
|Idaho||$468||Same deductions and exemptions as federal and quick ramp to 6%+ rate|
|Colorado||$567||Flat tax on Federal taxable income without state-specific credits|
|New Jersey||$581||See notes|
|Montana||$755||Decent deductions but rates start at 5%; some preferable treatment of capital gains|
|New York||$771||Moderate deductions and moderate rates|
|Louisiana||$785||Moderate deductions and moderate rates|
|Mississippi||$795||Moderate ramp up the brackets and good exemptions|
|Delaware||$978||Relatively small deductions and exemptions|
|New Hampshire||$1,010||Flat 5% on dividends and interest (not capital gains or W-2 income)|
|Tennessee||$1,125||Same rules as New Hampshire, but smaller exemption; rates will go down 1% per year until 2021, when the tax will go away|
|North Carolina||$1,068||Flat tax (5.75%) with pretty decent standard deduction (and child tax credit)|
|Pennsylvania||$1,136||Low-rate (3%) flat tax with no deductions or exemptions|
|Georgia||$1,159||Such a steep ramp in rates (max 6% by $7,000 income) makes Georgia effectively a flat-tax state|
|West Virginia||$1,170||No deductions and small exemptions|
|Virginia||$1,365||Modest deductions and fast jump to 5%+ rate|
|Hawaii||$1,389||Very low deductions and exemptions and fast ramp to ~7% marginal rates|
|Alabama||$1,398||Fast ramp up the brackets makes this almost a 5% flat tax; modest deduction/exemption|
|Maryland||$1,470||See notes; could be as high as $1,809 based on locality.|
|Kentucky||$1,817||Laughably low deductions and exemptions and a marriage penalty. A somewhat better result can be gotten by filing separately.|
|Oregon||$1,882||Small deductions and credits and very high rates (9% after $8,000)|
|Massachusetts||$1,887||Generous deductions and exemptions DO NOT APPLY to interest, dividends, or capital gains|
- If interest income is from U.S. federal obligations (Treasuries) it is not taxable as income by the states. In the above, I did not take that into account. But say, for example, that the $3,500 of interest income above is from a total-bond-market fund, such as the popular Barclay’s Aggregate…in that case, something like 30%–40% of the interest is from Treasuries and the taxable income in each state would be lower by about $1,000. This would have an almost unnoticeable effect in the high-tax states but would make a very measurable difference in the low-tax states.
- New Jersey is easily the most infuriating state yet, if only because even getting the tax forms from the official source requires installing Adobe Acrobat. Since I refused to do that, I got it from a third-party source. Although I don’t guarantee any of the numbers here, I really don’t guarantee New Jersey’s. On a practical note, New Jersey allows the deduction of property tax, or if a renter, 18% of rent. For someone renting a place at about $1,000/month, that will reduce the taxes by about $50. This isn’t included in the table, though, because the actual amount will be very situation-specific.
- Maryland collects local tax as well as statewide tax through its state tax forms. I used the lowest local rate in calculating the number in the table. Using the highest local rate, the tax could be as great as $1,809.