Understanding State & Local Taxes in Your New Home

Tax Tips

If you’re thinking about moving to a new city and have a bit of flexibility on where you are going, one thing you should consider is the role of taxes in that decision. I don’t mean the deducting the costs of your move, though that’s certainly a good idea if it applies, but the taxes changes you are likely to feel moving from one jurisdiction to another.

For example, many states have instituted a “millionaire” tax, including my home state of Maryland, where high earners see much higher income tax rates as they move up the earning ladder (incomes of over a million are taxed at 6.25%). Some states may begin instituting similar laws, such as New Jersey, or they may learn from the Maryland millionaire exodus and recognize that millionaires are quite mobile!

Chances are you don’t pull in a million bucks a year but there are other taxes that could affect your relocation decision.

No Income Tax

Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming do not have a state income tax. Tennessee taxes income received from stocks and bonds at 6% and New Hampshire taxes interest and dividends at 5%.

No Sales Tax

If the income tax free states aren’t appealing, you could always consider moving to a state without a sales tax. Alaska, Delaware, Montana, New Hampshire, and Oregon do not collect sales tax, which means your dollar goes a little farther in those states. Double bonus points for Alaska and New Hampshire as they are the only states that have no income tax and no sales tax.

It’s also important to note that some states offer sales tax holidays, where sales tax isn’t collected on the sale of certain items.

“Best of” Lists

After the clear cut income and sales taxes, it’s a little harder to gauge what makes a good tax-friendly location. Your lifestyle will start to dictate which taxes you are subject to. If you smoke, then you’ll be paying more in cigarette taxes than a non-smoker. If you own a house, you’ll pay a larger share of property taxes than someone who simply rents. That’s why looking at “best” lists are valuable as they give you an average for an area, which you can adjust based on your personal needs.

Last year, CNN Money used a 2008 report to put together a list of big city taxes, which lists major cities and their effective tax rates after adding income, property, sales, and auto taxes. Philadelphia, PA had an effective 15.5% tax rate with Baltimore, MD just behind her with 13.4%. Often maligned New York City stood at 9.8% (16th) while Anchorage, AK was 51st with a 3.6% effective tax rate.

If your plans don’t take you to a big city, CNN Money leaned on the Tax Foundation to create a list based on the state and their state and local taxes. New Jersey and New York led the way with 11.8% and 11.7% respectively. Can you guess the 50th state? Yeah, it’s Alaska with a 6.4% tax rate. If you don’t want to be taxed, go to Alaska.

Of course, taxes aren’t everything. You have to consider a lot of options and factors whenever you make a major relocation but if you have flexibility, it’s important to recognize the significant role taxes can play on your finances. By moving to a state without income taxes, you are basically giving yourself a single digit raise that propagates throughout your working years.

Jim writes about financial matters at his personal finance blog Bargaineering.com.

Comments (2) Leave your comment

  1. I just did my income tax using turbo tax. When I file my state tax (PA) Philadelphia. The amount for the state appears but I was not requiered to put the local tax which is differently. So what I do now, I do not know if it is something else I must do. My employer took money from my pay check for state income taxes 492.79 and local taxes for 663.55. Please let me know.

    Carlos Pacheco

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