State taxes are confusing. Comparing taxes between states is even more confusing. When determining which state is more “tax-friendly” than another state, one must consider the state income tax, local income tax, sales tax, property tax, inheritance tax, capital gains tax, miscellaneous excise taxes, etc. The list is never-ending. Some states may be lenient on income tax, but heavy on property tax and vice versa. However, there is an exception to every rule. New Jersey is our exception. Don’t move to New Jersey unless you want to pay a ton of tax.
State income taxes tend to be the frontrunning standard for a state’s “tax friendliness”. I wouldn’t recommend solely looking at state income tax when analyzing a state, but I’ll play along. When looking at a state’s income tax, a person needs to consider many variables that might affect a determination of whether that state actually has a “tax-friendly” income tax. Obviously, states that do not have an income tax meet the gold standard. The remaining states, however, are not quite as transparent. When looking at a state, consider these suggestions in your analysis.
- Does your state have a flat tax or a progressive tax? Is there only one (flat) tax bracket, or does your state (arguably) penalize you for making more money?
- Does the state in question offer significant adjustments, deductions, or credits that are applicable to your situation? Maybe you live in a high-tax state, but maybe that state gives you a generous tax credit for being a lower-income worker. Some states provide tax breaks for retirement income. Consider your situation and factor that into the analysis.
- If you live in a state with a progressive tax bracket, how progressive are the tax brackets? I’ve heard people talk about how high a state’s income tax bracket is, only to learn that the person is nowhere near that particular tax bracket. Don’t let the high tax numbers scare you unless, of course, you fall into that tax bracket.
- What kind of trend does the state show concerning income tax? For instance, I practice in Ohio. Over the course of approximately twenty years, tax rates have substantially subsided. There has not been a massive jump in any particular year, but the trend over two decades has been very taxpayer-friendly.
- How aggressive is the state’s Department of Revenue/Tax? Some states are more likely to audit a taxpayer. This consideration isn’t a major concern for most taxpayers. Most tax returns are cut and dry – receive your W-2 and maybe a couple of 1099s. However, some taxpayers have a less straightforward tax return – maybe a business or possibly income in multiple states. Dealing with an aggressive state can be exceedingly frustrating, especially when you’ve done nothing wrong! This consideration might not affect a person’s bottom line, but it is certainly noteworthy.
I understand I didn’t answer the question to my own prompt, but now you have the tools to do your own research. Good luck!
MoneyManeuvering 