State Taxes for Jailbroken Living

I’m a detail-oriented person—too detail-oriented, sometimes, for my own good. While I’m perfectly capable of thinking big-picture, I sometimes just enjoy figuring things out, even if those things aren’t particularly important in the grand scheme of things. There are many such examples in the realm of personal finance, and one of those is state income taxes. For the most part, we (like most other people) will choose where we want to live when we’re Jailbroken partly by considering costs, but mostly by considering where we want to live and what we want to do. So cost of living is an important but secondary factor, and state income taxes are a secondary factor when determining cost of living. In engineering we often just ignore such second-order effects—but, of course, we have to know that they’re second-order before we ignore them.

There was a discussion recently over at Our Next Life (here) about whether California was a good place for an early retiree to live, given its reputation as a high-tax state. The prevailing answer to that question was based on, first: do they want to live in California? Yes. Then: can they afford the taxes? Yes. But it was an open question about what it meant to afford the taxes.

So my curiosity led me to wonder how the states stack up in terms of taxes on what we might expect an early-retiree budget to look like, rather than based on the metric of highest marginal rates, which is how states are usually ranked. Online tax estimators aren’t really much help in this, because the best of them seem to ignore things like deductions and credits, which can vary wildly between states, and they generally assume your income is earned income, which can be treated very differently than investment income. So, wanting to know what we’re dealing with, I decided to fill out some tax forms and see.

Estimating State Taxes

Filling out state tax forms can be easier than the federal forms, often because the numbers are based on the federal numbers, which you’ve presumably already calculated; but they can also be more difficult, because if the rules are arcane they can be hard to apply properly. I give kudos in particular to West Virginia, which has a form that fills itself out once you’ve given it your numbers: why don’t all states do that? At any rate, the process is actually pretty repetitive and I quickly got the hang of how the states deal with income. So except for the outliers that have strange rules, it didn’t take much time.

As of right now, I’ve calculated the taxes for 17 states (plus 7 that have no income tax) that represent places that are attractive to me for one reason or another. I’ll add to the list as time goes on, which will be permanently hosted at http://plottingforjailbreak.com/state-taxes/. The goal is to have all 50 states represented. The data table for what I have now is reproduced below.

For income, I assumed the following:

  • 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.

A couple surprises that have shown up already:

  • California, despite being considered a high-tax state, would tax this income profile at $0. The state’s tax structure is highly progressive and taxes don’t even kick in until an income level a bit higher than what is assumed here.
  • New Hampshire, often considered a no-tax state, has one of the highest taxes in the ranking. That’s because, while they don’t tax earned income, they do tax investment income, without deduction or exemption. All else being equal, one would save almost $1,000 per year by just hopping the border and settling in Vermont or Maine instead.

All else is not always equal, though, and state income taxes are only one part of the total financial picture for someone in Jailbreak. Property taxes, healthcare costs, and overall cost of living can swamp the effect of state taxes. But like anything else, you never know until you sit down and figure it out.

A note about the rankings: the table is sorted in order from lowest tax liability to highest. This ranking would probably be preserved fairly well if the income in question varied plus or minus around $10,000; but much more variation upward would start to shift things significantly as states with progressive tax systems begin to overtake those with flat taxes. For a similar ranking of states, but for roughly double the income, see State of Confusion: Does Location Matter for Retirement Taxes? (Beware the limitations of the tax estimator used for those estimates, though: the “New Hampshire effect” is clearly absent there, for example.)

The Rankings

Note: there is an updated table with 13 additional states in a more recent post.

Obligatory note: I’m not an accountant, and this list is for educational purposes only. I am very good at following instructions, though, which is almost all of the battle when filling out tax forms.

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%)
Vermont $352 Low rate (3.5%) with all federal deductions/exemptions.
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
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
New Hampshire $1,010 Flat 5% on dividends and interest (not capital gains or W-2 income)
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
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.

6 Comments

  1. Thanks for doing the math on this! And of course this is only income tax, so many of those “no tax” states compensate with higher property taxes or sales taxes, skewing this even more in favor of some of the most “high-tax” states. I’ll link back in my post!

    November 6, 2017
    Reply
    • Too true…just like with the income taxes, there’s no substitute for running the numbers on every aspect of cost of living! It’s one thing if you are retiring where you have lived for a long time (like you are), so you already appreciate what all the costs of living are…then you can go a little bit more by feel. But if you’re like me, and will retire of necessity somewhere completely unlike where you live now, thorough research is a must. At least, for my personality type!

      November 13, 2017
      Reply
  2. TJ said:

    I was a little shocked that you could get your CA taxes down to 0 on that income, but sure enough, the exemption credits for MFJ + dependant are just enough to wipe out the taxes.

    You could theoretically have a 0% tax rate for an even higher income using California Tax Exempt Bonds, but I think that would be rather nuts as you’d have more profit with a taxable bond in the low tax brackets.

    The problem of course is building up a portfolio that can throw off $37k of reliable annual income. I also feel like it’d be tough to live on $37k in many parts of CA without paid off real estate so you’d need a bigger nest egg to account for that too.

    I chose to move out of the state mostly because it would require me to work significantly longer. Basically, the delta between the income I can get in CA vs elsewhere just isn’t anywhere close to the delta between cost of living in CA vs. elsewhere, at least for me.

    I love the CA weather, but I’ve always called CA the home of the weather tax and it reached the point where it just wasn’t worth paying that anymore. :)

    My new state, Arizona, definitely does tax more at that specific income (about $550 it appears), the cost of living is so much lower (and less snobby lifestyle!) that it would be worth it (for me).

    November 13, 2017
    Reply
    • I was surprised too…you might think I chose $37,000 just so I could hit the $0 number for California, but it was unintentional. I always thought that the taxes would keep me from moving back to California—I also left years ago, and while it wasn’t because of the taxes, I did realize a big boost in take-home pay—but if this kind of income could be made to work with CA’s cost of living, then I now realize the taxes won’t necessarily be a barrier. Just goes to show that there’s no substitute for running the numbers.

      Then again, there are all sorts of beautiful places in Arizona! I’m partial to Flagstaff myself.

      November 13, 2017
      Reply

Leave a Reply

Your email address will not be published. Required fields are marked *