State Taxes: Eastern Seaboard and Gulf Coast

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.

The Results

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!).

State Tax Liability
State Tax Liability  Notes
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
New Mexico $108
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
Utah $667
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

Notes

  • 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.

3 Comments

  1. TJ said:

    ” 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. ”

    Not true. You would need to look at the instructions for each state. IIRC, California doesn’t let you segregate it like that and if it doesn’t meet the requirements, none of it is tax exempt, I want to say it was more than 50% of the income had to be from a treasury source (or maybe it was 50% of the assets in the fund had to be treasuries…it’s one of those)

    November 15, 2017
    Reply
    • Yes, you are right about that. Even though the states are prohibited by federal law from taxing income derived from Treasuries, California does stipulate that at least half of the assets in a bond fund must be Treasuries or California bonds in order for their portion of the interest to be exempted from tax. Those two laws appear to be in conflict with one another, from my layman’s vantage point.

      In any case, the brokerage that provides your 1099 has to break out the amount of income attributable to Treasuries in order for you to claim the exemption. It looks like a little more care than normal is required in California.

      November 16, 2017
      Reply

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