Why is state tax planning important?
When it comes to money, it’s not how much you make that matters, it’s what you keep. Numerous expenses hit pocketbooks across the nation, but taxes are often the largest financial burden on Americans. In addition to federal income taxes, the average family pays thousands of dollars in state and local taxes each year. However, tax bills can vary significantly among states.
Forty-three states levy individual income taxes as well as the District of Columbia. Two states—New Hampshire and Tennessee—exclusively tax dividend and interest income at 5 percent, respectively. Seven states have no income tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming. Several states have a relatively low income tax rate across all income levels. For example, the highest marginal income tax rates in Arizona, Kansas, New Mexico, North Dakota and Ohio are below 5 percent. Eight states have only one income tax bracket, charging their residents the same rate on all income, which is called a flat rate.
These states are: Colorado (4.63 percent), Illinois (3.75 percent), Indiana (3.23 percent), Massachusetts (5.10 percent), Michigan (4.25 percent), North Carolina (5.499 percent), Pennsylvania (3.07 percent), and Utah (5.0 percent).
Currently, California has the highest incremental state tax rate, at 13.3 percent. California also has the largest number of tax brackets (10), ranging from 1.0 to 13.3 percent. North Dakota has the lowest incremental state tax rate at 2.90 percent, while Kansas has the smallest number of tax brackets (two).
Under current tax law, individuals who take the itemized deduction on their federal tax return can deduct the cost of state and local income taxes. This deduction can potentially reduce their federal tax liability for the year.
For taxpayers in every income bracket, geographic location is an important factor in determining their tax burden.
Taxpayers who are impacted by the alternative minimum tax likely will find they receive little or no benefit on their federal return.
President Donald Trump’s tax reform plan would eliminate the state and local tax deduction. What is clear is that residents in states that impose the highest combination of property taxes and individual and corporate income taxes would pay the most. Even in states without income taxes, some residents benefit because they can deduct sales taxes instead.
Fourteen states and the District of Columbia allow cities, counties and municipalities to levy their own separate individual income taxes in addition to state income taxes. If you live in these areas or are thinking of moving to these areas, be ready to fork over income taxes to the federal government, the state and the city: Alabama, Arkansas, Colorado, District of Columbia, Delaware, Iowa, Indiana, Kentucky, Maryland, Michigan, Missouri, New York, Ohio, Oregon and Pennsylvania.
For taxpayers in every income bracket, geographic location is an important factor in determining their tax burden. A state that is economically friendly for low-income families may tax the high net worth at stratospheric rates. As you can see, there are lots of factors to take into consideration when deciding which state is right for you.
For example, in retirement, when every single dollar of income counts, moving to a tax-friendly state, a place where you’ll get the most after-tax income possible, makes good financial sense. But the most tax friendly state for you and your household will depend on your sources of income and how states tax that income. What’s more, you’ll have to determine how state and local sales tax, state and local property taxes and state estate taxes affect your family finances as well. Proper planning by a team of professional advisors will assist you in establishing a desired state of residence, which can significantly reduce your tax burden.
This article is distributed with the understanding that CBIZ is not rendering legal, accounting or other professional advice. To the extent anything herein could be construed as tax advice, such advice is not intended to be used and cannot be used to avoid penalties under the Internal Revenue Code, or to promote, market or recommend to another person any tax-related matter. This information is general in nature and may be affected by changes in law or in the interpretation of such laws. The reader is advised to contact a professional prior to taking any action based upon this information. CBIZ assumes no liability whatsoever in connection with the use of this information and assumes no obligation to inform the reader of any changes in laws or other factors that could affect the information contained herein.