Would You Move to Lower Your Taxes?

Yahoo has a piece on people who have moved to low-tax states to save a bundle of money. Their thoughts:

Of course, changing your life just to save on taxes is extreme. But it could happen more and more in the future, as some states aim to fix their budgets with dramatic tax increases, as Illinois did earlier this month.

Many of the states with large population gains in the 2010 Census are well-known low-tax havens, such as Florida, Texas and Nevada.

Of course there are other costs besides taxes to consider. You're not going to make progress if you move somewhere because taxes are low and yet housing and other costs are higher. And there are other issues in living somewhere than cost (as we've hashed out and re-hashed here.) That said, you can see why people might want to move -- especially from "less desirable" to "more desirable" states.

For instance:

• I live in Michigan. I'll let you decide whether you think it's a "less desirable" or "more desirable" state, but I think we both know the answer.
• Let's say when I retire I have enough savings/investments as well as part-time work to earn $100,000 per year.
• The Michigan state income tax rate is 4.35%. So I'd owe $4,350 in income taxes.
• Florida has no state income tax. So I'd save $4,350 in income taxes alone by moving from Michigan to Florida.

No, that's probably not enough to get someone to move but this is savings in income taxes alone. What if there were other tax savings? Here are some examples that are much more compelling:

"There can be pretty big dollars involved," said Lisa Osofsky, a CPA and financial adviser who helps clients from New Jersey, New York and Connecticut figure out their pre- and post- move finances. "A wealthy individual who could be earning several million dollars could save $50,000 or $100,000" by living in a lower-tax state, she said.

A family of four with $150,000 in income would save $13,368 in state and local income taxes if they traded in New York for Florida, according to calculations prepared by Bob Meighan of TurboTax. That doesn't even count additional savings in property taxes, estate taxes, or the cost of winter coats and boots. (Though some of those savings would be shaved when the state taxes were deducted from their federal taxable income.)

A couple with $85,000 in retirement income and Social Security benefits could squeeze out an extra $112 a month in income tax savings if they moved from California to Michigan, Meighan said. And get a lower cost of living, too.

Ha! Cost-of-living is probably even a bigger savings than taxes (taxes are a subset of costs) -- but let's stick to the subject.

Back to my example. Let's say that I'm a wealthy individual and make $1,000,000 a year. Now look at the numbers:

• The Michigan state income tax rate is 4.35%. So I'd owe $43,500 in income taxes.
• Florida has no state income tax. So I'd save $43,500 in income taxes alone by moving from Michigan to Florida.

Now does it look a bit more compelling? The impact is the greatest (of course) on those people who make the most money. Now is $43k enough to get someone who makes $1M a year to move? Maybe.

I'm not sure what we'll do. Our family is in different states and while we have friends here, I'm not sure we'll stick around once we retire. Then again we may opt for the "home in Michigan, condo in Florida for the winter months" that so many people here go with.

How about you? Anyone considering a move based on taxes either now or in the future?

Comments

[Desert Rat]

Remember, state and local income taxes are just part of the picture. Local government must raise revenue somehow, and if state and local income taxes are low or non-existent then property taxes and/or sales taxes are probably quite high. For example, my property taxes in Arizona are about $1,500 a year. In Florida, they would be about $11,000 a year.

[Matt]

Complicated equation.

I know Rush Limbaugh moved from New York City to Florida to excape the high taxes in NY.

My biggest delimea is the emotional equation. Wife has stated that she would like to live close enough to the grand kids. Well first we need to get grand kids and second we would need to look at the taxes of that state and then..... Well you know the picture I am looking at. Totally devoid of money and rational.

Then there is friends and family. Another emotional aspect important to wife.

Strictly speeaking money wise I would need to move because when I retire I can not afford the cost of living where I am now. I can move 90 miles north and cut my car insurance by half, save on taxes,reduce my potential for crime etc. without leaving the state I am in. Plus I could sell my house and get something less expensive and probably bigger if I felt like it.

[Dr Dean]

One other consideration.
A recent article I read interviewed several who had moved to a low tax state.

They spent more than their tax savings every year going home to visit family.

The law of unintended consequences rears its head again.

There are a lot of factors that should go into the moving decision.

[Mike B.]

Unfortunately, I have an inkling that those making > $1M/yr 'live' in places like Florida and Nevada. And by 'live' I mean own a condo there and say it's their 6 mos./yr residence.

[Sarah]

Yeah - low income tax has to be made up with taxes somewhere else. property or in tourist-heavy areas, probably sales taxes. The idea of moving to avoid taxes seems silly to me...

Then again, I live in Ohio now, and used to live in Michigan, and let me tell you - I miss Michigan taxes! Ohio has a sliding-scale income tax, plus every local entity has income tax between 1.5 and 2.5%.

[JM]

No, but I'm sure glad I'm moving back to Massachusetts this year. City and school district taxes in Ohio are a PITA. I don't mind paying them, but their forms are a nightmare and a lot of companies don't know how to correctly handle collection of local taxes in their payroll... which I'm learning this year with my husband's employer. Good thing I work for a CPA firm! ;)

[Ginger]

My fiance and I live in NY right now, for his grad school and finances were on our mind when we chose this place. Graduate schools were paying the same amount (for a research assistant) no matter the place yet buffalo had a lower cost of living than any other place. By moving here we were able to buy a duplex, and will have our down payment back by the time we move (therefore spending no more than normal rent in this area) and we will have a rental. In Ca, we would have been never been able to afford rent ($1000 vs $600) much less our own home. That does not even account for the difference in cost of food ($50 vs $100/week in groceries). Though I hated spending $3000 to move here, it was worth it. And buffalo is 53rd in research in the country, still really good. We will move in three years and again two-five years from then and we plan to find hidden gems for each move if we can. Don't just look at taxes, look at the whole picture.

[Mike]

Michigan is a highly desirable place for me!

At least, the UP is, I'm not sure I could live below the bridge.

I'm currently living in Minnesota which is pretty nice too, but it's got nothing on Michigan's Upper Peninsula!

[LL]

'Look at the whole picture' - couldn't agree more. I knew a family that moved from California to Texas and paid MORE in taxes. Property tax and sales tax are both higher in TX. The state's services are also considerably less than CA. When I lived in Texas, it seemed like the state was constantly finding new ways to squeeze residents. For example, if you get a certain number of driving points, or specific driving infractions, you will pay $300-$1000 per year for your driver license...for the next 3-5 years. That's not the court cost, fine, or penalty - it's the ADDED cost you will pay to have a license, after you pay those other fees!

I moved from Dallas to San Diego and noticed lots of things cost less in CA - car insurance, renters insurance, groceries, utilities. Especially electricity (goodbye non-stop AC)!

Anyone who's owned their home a long time in CA makes out like a bandit on property taxes - capped at 1% of purchase price!

[Apex]

@Mike,

You think Minnesota is nice? Which part is that?

Is that our 7.85% top income tax rate (kicking in at about 75K for single and 7% starts at 23K) or the proposed 13% top income tax rate to close the budget deficit?

Would that be that we are ranked 43 out of the 50 states in business tax climate or that we are the 7th highest state for personal tax burden?

Would that be our 7+% sales tax (which ranks us 17th highest nationally) or our average property tax which is ranked 27th highest in the nation? Even our best ranking in our best category does us no better than average meaning that property tax is also not a good deal here.

Would that be the fact that we are #1 in the nation with 37% of our budget spent on welfare or the fact that we are trying to become #1 in the nation with the highest top income tax rate of all 50 states?

South Dakota has zero% income tax, same or slightly lower sales tax as Minnesota except that it includes food and clothing which Minnesota exempts, and they have a bit higher property tax than Minnesota but not that much higher. South Dakota is ranked the 47th highest tax burden state, meaning it is the 4th best. It's right next door to Minnesota. How do they do that? Spending maybe?

To those arguing that the states have to get the money somewhere? If they intend to spend it that's true. However there is another option, don't be the top state in the nation in Welfare give aways, don't throw money at the education system year after year without any increase in performance, don't have your new Governor make his first order a business on the day he takes the oath of office an executive order to raise medicaid payments when facing a 6 billion dollar budget deficit. In other words, do what South Dakota does, don't spend it and you don't have to tax it.

[jim]

I live in a state with a very high income tax.
I'm not thinking of moving.
I moved here from a state lower taxes because there are jobs here and were I lived didn't have jobs.
Job, family, cost of living, climate, culture, etc all matter more to me than a 1-2% total marginal difference in taxes.

At one point I entertained the idea of transferring to another location within our company in a neighboring state that has lower overall state taxes. But our company site in that state is not in a more isolated area and I don't know have any friends up there. The money savings wasn't nearly enough to make me uproot my life.

[JH]

The answer is yes, I would move. In fact I did move recently from Illinois to Alabama and was very excited to escape the Illinois mess. State income tax is a wash now that Illinois increased their rate from 3% to 5% and sales tax is about the same in Huntsville compared to where I lived in Chicago. Property taxes is where the big difference lies, where Illinois is 4x more for the same priced house.

Add in a much milder winter, an early spring, a city full of engineers (I am one), and incredibly pleasant people and I am one happy camper!

[LotharBot]

"low income tax has to be made up with taxes somewhere else" -- or with lower government spending.

Most interestingly, you can make up for low taxes by touting the benefits of low taxes. If low taxes draw businesses into your area and out of higher-tax areas, well, 5% of a lot of money is better than 10% of nothing.

[jim]

Apex said: "trying to become #1 in the nation with the highest top income tax rate of all 50 states?"

They don't seem to be trying that hard if the goal is #1. 7.8% would put them around 9th place. There are at least a couple states over 10% now and its a moving target.

[jim]

I said :
"But our company site in that state is not in a more isolated area and I don't know have any friends up there"

Ugh, sorry for my horrible grammar.

That should have read :

But our company site in that state is in a more isolated area and I don't have any friends up there.

[Texas Wahoo]

It certainly can make a difference in places like DC where you can live in DC, Maryland, or Virginia and easily commute to work. One of the big reasons I live in VA is because they have lower income taxes than the other two jurisdictions, especially for high earners.

['Beachin]

We're already planning our move in 10yrs. We live in NC, but plan to buy another home in SC (near HHI) and will use this as our primary residence.

This will save us the higher tax rate from NC, and we can spend all that extra money for sipping cocktails at the beach !

[Old Limey]

NO! - Absolutely not under any circumstances.

Apart from the fact that we came to the San Francisco Bay Area in 1960, and have roots, our reasons for deciding to spend the remainder of our life here after retirement are:

1) The temperate climate is fantastic, our beautiful green valley has a Bay to the East, then a range of mountains and an ocean to the West making A/C unecessary plus low humidity & no bugs.
2) There are so many county, state, regional and national parks within a short driving distance for hiking and recreation.
3) The area has a very international flavor because of all of the people that came here to work in the many hi-tech companies.
4) Proposition 13 keeps our property taxes very low because we have stayed in the same home since 1977 even though state income and sales taxes are high..
5) It is a blue state that welcomes progressive ideas.
6) It's where the Sierra Club was founded and is full of environmentalists like ourselves. Yes! I'm a tree hugger.

[Squirrelers]

At this point, I won't move to lower taxes. I am where I am, despite being in what I think the single most heavily taxed county in the Midwest (suburban Chicago), based on what I read regarding taxed percentage of home value.

Later in life, after kids are out of school, I'll definitely consider taxes as a variable in deciding where to live. It can make a relatively substatial difference.

As I write this, I realize that I'm considering property taxes. In addition - and perhaps more importantly - the state tax where I live (Illinois)has had a big hike in the state tax rate. I'm a loyal Chicagoan and think it's jewel of a city, but cold plus high cost of living = strong consideration toward eventual retirement in a place with at least one or the other - warm weather or lower cost of living.

Of course, I'm not in that stratospheric income bracket discussed in the post....

[TJ]

@Apex - 2010 facts about South Dakota - high tourism dollars with a small population compared to MN makes a big difference:

Visitor spending: $1.059 billion.
In 2010, visitor spending rose $96 million, which represents
an increase of 10 percent. This is the largest dollar increase
since tracking began in 1985. *
Economic impact: $2.6 billion statewide. *
Visitation increased by 3 percent in 2010. **
Tourism-related activity generated 20 percent of all state
and local tax revenue in 2010. **
Over 28,000 direct jobs were supported by core travel and
tourism economic activity. **
Tourism activity generated $265 million in state and local
government revenue in 2010, an increase of 4.8 percent over 2009. **
Without Tourism, each household would pay about $828 more in taxes. **
Every 434 visitors create a new job in South Dakota. **

[texashaze]

@LL - not sure where you lived in Texas but I think the taxes are quite low - no income taxes and no sales tax on food. I've never heard of that driver license fee, all I pay is 70 bucks a year for the tags on my car. The only taxes high here are property taxes and that depends on your town. I live in one of the highest school districts in the state and we choose to have higher taxes to pay for them. One good thing is that property taxes are tax deductable on the federal income tax.

[Apex]

@Jim,

You might have missed the area of my post that talked about the proposed 13% tax rate. That is the "trying" part.

[Apex]

@TJ,

SD has 800K people, MN has 5 million. MN has 6 times more people.

Using your numbers, SD has 1 billion in tourism spending. MN has 11 billion. 11 times more tourism dollars for 6 times more people.

28,000 tourism jobs in SD versus 238,000 in MN, 8.5 times more jobs for 6 times more people.

SD doesn't seem to be beating MN in tourism dollars. Hmmm, what could it be. Spending?

[LL]

@texashaze - I used to live in Dallas. Per the city's website, if you are in the DISD, property tax is nearly 3%. I believe that is on assessed value. The family I knew had owned their home in CA for many years, and the CA property taxes are assessed at 1% of purchase price, so the difference was huge in their case.

No sales tax on food is common in many states. Texas sales tax is 6.25, but municipality can tack on the extra 2%, so it's effectively 8.25 if you live in an urban area. 8.25 is fairly high, IMO. Of course, CA is now 8.75, also pretty high.

About the surcharge - not everyone has to pay it. You have to pay if you have more than 6 points on your driving record, or driving without a license, driving while license invalid (suspension), driving without insurance, or dwi. You are assessed 2 points for each moving violation, and they remain for 3 years. This is in additional to all the fines, costs, penalties they assess for violations. I'm sure it's a moot point for many residents, but my point is...states will be sure to get the money they want from somewhere. The extraction of money from residents is not always evenly distributed. So, I would do a careful assessment before assuming that lower sales tax will equal more money in your pocket.

Just my two cents. :)

[LL]

'lower sales tax will equal more money in your pocket' - I meant lower INCOME tax.

[jim]

Apex, Yes I missed that 13% rate proposal. My bad. That would in deed make them #1.

[jim]

One measure of how states stack up as far as taxes is to look at the 'tax freedom' day on the tax foundation website. They rank state/local total tax impact by state there.

http://www.taxfoundation.org/taxfreedomday/

Because each state has different mix of income, sales and property tax rates its hard to see the total cost by state unless you add it all up.

Alaska is #50 with very low taxes (if you aren't an oil company). In fact AK residents get an annual check. Connecticut is #1 with the highest taxes.

Rank of selected states that have been mentioned:

Michigan = 21
Florida = 31
Ohio = 23
South Dakota = 47
Texas = 32
Minnesota = 8
California = 7
Illinois = 14

[Anonymous]

While there are obviously different strokes for different folks, I cannot imagine relocating from IL to AL, as someone above did. As a person with a reasonably progressive outlook, that sounds like a major quality of life downgrade.

I live in one of the highest property tax towns in NC. My property taxes approach that of my parents' home, even though their house is worth 175% of ours. Still, I get public schools and a transportation system that others would cut their arm off for.

Our income is near 65k.

Maybe if you're fantastically wealthy and are living off dividends from your $12.5 million portfolio, and can fly where you want whenever you want, then there's an argument for living somewhere based on taxes.

For us, the community amenities here are too compelling to give up.

[Edwin @ Save The Bills]

That's a bit drastic, moving to another state just to save on taxes. People usually stay in the same place because of family, kids in school and jobs. I would guesstimate that not many would be willing to move for tax savings alone. I could see someone moving to another state because of cheap housing though.

[KMI]

Taxes alone wouldn't be enough to make me move, since they are only a portion of costs. Cost of Living, community amenities, natural hazards, insurance costs and climate all play into it too. NC does't have the lowest taxes - but the excellent climate (I can handle heat MUCH better than cold) and minimal natural disaster potential in my area make it well worth it. I wouldn't want to live in FL, for example, because the home insurance costs there are high enough to outweigh the tax costs here.