Retirement Account And Pension Income
The way a state handles retirement account and pension income can have a huge impact on the finances of a retiree. Many states do not provide any kind of deduction, exemption or credit on withdrawals from a retirement account such as a 401 or IRA.
How might that affect a typical retiree? Lets say your effective state tax rate in one of these states is 4% and your annual income from your 401 is $30,000. That would add up to taxes of $1,200 on that retirement account income taxes that you wouldnt have to pay in states like Alaska and Mississippi .
Exemptions for pension income are more common. Only a handful of states fully tax income from a government pension, while a few more tax income from a private employer pension. The other states either exempt that income or provide a deduction or credit against it.
Which Are The Highest Find Out Here
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One of the biggest tax bills that most people pay is the federal income tax calculated on the Internal Revenue Service Form 1040 in April of each calendar year. Three other major taxes come from your state or locality: state income taxes, sales taxes, and property taxes. The way that each type of tax is calculated is complicated factors such as your income level, marital status, and county of residence affect your tax rates.
Simple, apples-to-apples comparisons of how much total tax youll pay living in one state versus another are impossible. And since you pay state income tax on the money you earn, sales tax on the money you spend, and property tax on the value of any real estate you might own, you cant simply add up the average rates in each state and rank them from lowest to highest.
However, if youre trying to choose where to live or to locate your businessand taxes are a factor in your decisionthen the tables below can give you a big picture to use as the starting point for more research on how taxes in each state would impact your unique financial situation.
States Where The Tax Burden Has Changed Dramatically Over Time
Among states with declining tax burdens, Alaska is the extreme example. Before the Trans-Alaska Pipeline system was finished in 1977, taxpayers in Alaska paid 11.7 percent of their share of net national product in state and local taxes. By 1980, with oil tax revenue pouring in, Alaska repealed its personal income tax and started sending out checks to residents instead. The tax burden plummeted, and now Alaskans are the least taxed with a burden of only 4.6 percent of income.
Similarly, North Dakotas burden has fallen from 13.0 percent in 1977 to 8.8 percent of net state product in 2022.
Although the majority of states have seen a decrease in tax burdens over time, 16 have experienced increases since 1977, many of these likely to be temporary upticks due to the pandemic. Connecticut taxpayers have seen the largest increase, of 3.3 percentage points, followed by Hawaii at 2.5 percent.
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How To Lower Your Property Taxes
If you are interested in lowering your property taxes, know that you are not the only one! Many Americans wish for lower property tax rates to help ease the costs associated with homeownership. Not surprisingly, there are a few ways you can achieve this goal. The following options exist to help lower your property taxes:
Check Eligibility For Property Tax Exemption
File For A Homestead Exemption
Raise Concerns With The Tax Assessor
How State Income Tax Rates Work
In general, states take one of three approaches to taxing residents and/or workers:
No tax income at all.
Flat tax. That means they tax all income, or dividends and interest only in some cases, at the same rate.
Progressive tax. That means people with higher taxable incomes pay higher state income tax rates.
If, like most people, you live and work in the same state, you probably need to file only one state return each year. But if you moved to another state during the year, lived in one state but worked in another or have, say, income-producing rental properties in multiple states, you might need to file more than one. And because the price of most tax software packages includes preparation and filing for only one state. Filing multiple state income tax returns often means paying extra.
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Total Tax Burden: 684%
New Hampshire does not tax earned income but does tax dividends and interest. New Hampshires Senate passed legislation to phase out the investment income tax by 1% per year over five years, with full implementation by 2027. The state has no state sales tax but does levy excise taxes, including taxes on alcohol, and its average property tax rate of 1.86% of property values is the third highest in the country.
Even so, New Hampshires total tax burden is just 6.84%, according to WalletHub, ranking the state fifth in the nation. The state ranks fourth on the U.S. News & World Report list of Best States to Live In and 38th in the nation for affordability.
Although New Hampshire spent more on education than any other state on this list at $17,462 per pupil in 2019, its outlay was among the lowest in the northeastern region of the U.S. Additionally, in 2015 it earned a grade of D from the Education Law Center for its school funding distribution.
New Hampshire received a marginally better grade of C- for its infrastructure in 2017. At $9,589 per capita in 2014, its healthcare spending is the ninth highest in the nation.
What About States Without Income Taxes
Not levying a personal income tax requires tradeoffs that are often detrimental to tax fairness. It is a common misconception that states without personal income taxes are low tax. In reality, to compensate for lack of income tax revenues these state governments often rely more heavily on sales and excise taxes that disproportionately impact lower-income families. As a result, while the nine states without broad-based personal income taxes are universally low tax for households earning large incomes, these states tend to be higher tax for the poor.
Note: The nine states without broad-based personal income taxes are Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. Tennessee levies a limited personal income tax that only applies to interest and dividend income it is set to expire in 2021.
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Calendar Year 2022 Results: Tax Burden By State
State-local tax burdens of each of the 50 states residents as a share of income are clustered quite close to one another. This is logical considering state and local governments fund similar activities such as public education, transportation, prison systems, and health programs, often under the same federal mandates. Furthermore, tax competition between states can often make dramatic differences in the level of taxation between similar, nearby states unsustainable in the long run.
Nationwide, 20 percent of all state and local taxes are collected from nonresidents. As a result, the residents of all states pay surprisingly high shares of their total tax burdens to out-of-state governments. Table 2 lists the per capita dollar amounts of total tax burden and income that are divided to compute each states burden, as well as the breakdown of in-state and out-of-state payments for calendar year 2022.
The residents of three states stand above the rest, experiencing the highest state-local tax burdens in the country: New York , Connecticut , and Hawaii . By contrast, the median state-local tax burden is 10.2 percent, and the national average is 11.6 percent. Three states are at or below 8 percent: Alaska , Wyoming , and Tennessee
The states with the highest state-local tax burdens in calendar year 2022 were:
1. New York 2. Connecticut
Check Eligibility For Property Tax Exemption
There are certain property tax exemptions available at the state and local level, depending on where you live. Thy are typically reserved for seniors, veterans, active-duty service members, and individuals with disabilities. If any of these apply to you, you can apply for an exemption with your county. Note that for some of these categories, there may be additional income requirements as well. In some situations, homeowners may be eligible for a complete exemption from property taxes.
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Total Tax Burden: 819%
The Lone Star State loathes personal income taxes so much that it decided to forbid them in the states constitution. Still, because infrastructure and services must be paid for somehow, Texas relies on income from sales and excise taxes to foot the bill.
Sales tax can be as high as 8.25% in some jurisdictions. Property taxes are also higher than in most states, the net result of which is a total tax burden of 8.19% of personal income. Nevertheless, Texans overall tax bite is still one of the lowest in the U.S., with the state ranking 19th. Texas is average for affordability at 22nd in the nation, but it was ranked 31st by U.S. News & World Report on the Best States to Live In list.
Texas spent $9,827 per pupil on education in 2019, ranking it below average among the 17 Southern states, and it received a D grade for its school funding distribution in 2015. In 2021 the ASCE awarded it a grade of C for its infrastructure. Texas spent $6,998 per capita on healthcare in 2014, the seventh-lowest amount in the U.S.
One advantage of living in a no-tax state is that the $10,000 cap on state and local tax deductions imposed by the Tax Cuts and Jobs Act will likely not have as great an impact as it does on residents of high-tax states, such as California and New York.
Combined Sales And Income Tax Leaders
The Tax Foundation interprets individual tax burden by what taxpayers actually spend in local and state taxes, rather than report these expenses from the state revenue perspective used by the Census Bureau. Its 2019 State and Local Tax Burden Rankings study reported that Americans paid an average rate of 9.9% in state and local taxes.
According to the foundation, the top five states with the highest state and local tax combinations are:
- California and Wisconsin 11.0%
The same states have ranked as the top three consistently since 2005, according to the foundation.
Although taxes may not be the first thing you consider when deciding where to live, knowing the tax situations of the locations you’re considering for a move could help you save in the long-run, especially when retiring.
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States With The Highest And Lowest Property Taxes
Property tax falls under local, not state, jurisdiction. Median household property tax payments from analysis performed by the Tax Foundation as a percentage of median household income from the Census Bureau’s 2018 American Community Survey cites these as the counties with the most expensive property tax:
- Essex County, New Jersey 16.86%
- Passaic County, New Jersey 14.62%
- Union County, New Jersey 12.70%
These Louisiana parishes hold the least expensive spots for property tax as a percent of income:
- Assumption Parish 0%
- Vernon Parish 0.45%
- Grant Parish 0.68%
Louisiana carries some of the lowest property tax rates as a percentage of earned income because it offers a homestead exemption. This law allows the first $7,500 of assessed property values to forego having property taxes levied against them.
For reference, assessed home values represent 1/10 of the home’s actual value. For example, a $100,000 home would have a $10,000 assessed value. Therefore, Louisiana’s homestead exemption allows the first $75,000 of home value not to count toward calculating your property tax bill, which goes a long way toward lowering the percentage of income that goes toward these taxes.
Ten States With The Lowest Sales Tax Rates In The Us
Sales tax is collected at the state level in forty-five states and in the District of Columbia. New Hampshire, Oregon, Montana, Alaska, and Delaware, otherwise known as the NOMAD states, are the only states that do not have a state-level sales tax, although some local levels in Alaska do impose a sales tax.
Sales tax rates vary significantly from state to state. Below is a list of the ten states with the lowest average combined state and local sales tax rates across the US.
Right off the bat, we have a 4-way tie for spot #10, which puts the first four states in a tie for #7:
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Which Taxes Are Included In The Tax Burdens Estimates
We include all taxes reported by the Census Bureaus State and Local Government Finance division, the most comprehensive resource on state and local tax collections data and our tax burden models starting point. These taxes are:
- Property taxes
- General sales taxes
- Excise taxes on alcoholic beverages, amusements, insurance premiums, motor fuels, pari-mutuels, public utilities, tobacco products, and other miscellaneous transactions
- License taxes on alcoholic beverages, amusements, general corporations, hunting and fishing, motor vehicles, motor vehicle operators, public utilities, occupations and businesses not classified elsewhere, and other miscellaneous licenses
- Individual income taxes
- Estate, inheritance, and gift taxes
- Documentary and transfer taxes
- Special assessments for property improvements and
- Miscellaneous taxes not classified in one of the above categories.
Our time unit of measure is the calendar year. Fiscal year data from states have been adjusted to match the calendar year. The state and local tax burden estimates for calendar year 2022 presented in this paper are based on the most recent data available from the Census Bureau, the Bureau of Economic Analysis, and all other data sources employed, and grossed up to the present based on the latest economic data.
State By State: The Highest And Lowest Sales Taxes
24/7 Wall St. recently determined the states with the highest and lowest sales tax by studying data collected in 2017 by the Tax Foundation. The ranking was generated based on the average of local sales tax rates and the sum of the statewide sales tax rate.
There are 5 states in the U.S. that do not levy statewide sales tax, and 12 that do not collect local sales taxes. States that do not impose sales tax on either level include Delaware, Montana, New Hampshire and Oregon.
Where are the Lowest Sales Taxes in the US?
Where are the Highest Sales Taxes in the US?
While many states balance revenue between different types of taxes such as income, sales, and property taxes, other states opt out of one or more types of taxation entirely. For example, in Oregon where there is no sales tax is imposed, approximately 41% of state and local collections come from income tax. This is the highest share of tax revenue from income tax in any state. On the other hand, the state of Washington does not collect income tax, and holds the fifth highest combined sales tax rate in the country.
Many states struggle to determine whether to levy sales or income tax. According to 24/7 Wall St., Just over half of states earn more revenue from income than sales tax. Income tax allows for a higher share of revenue to come from affluent residents. A high sales tax disproportionately affects poor residents, as they pay a higher share of their income in sales taxes than wealthier residents.
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Can I Get A Sales Tax Credit For My Trade
In many states, you can get a sales tax credit based on the value of your trade-in. Depending on the amount of your appraisal, you may be able to get more money trading to the dealership than selling your car on your own.
Weâve created a calculator that will tell you the tax credit amount and help you determine whether itâs better to trade-in to the dealership or to sell your car privately.
Tax information and rates are subject to change, please be sure to verify with your local DMV.
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State & Local Tax Breakdown
All effective tax rates shown below were calculated as a percentage of the mean third quintile U.S. income of $63,218 and based on the characteristics of the Median U.S. Household*.
*Assumes Median U.S. Household has an income equal to $63,218 owns a home valued at $217,500 owns a car valued at $25,295 and spends annually an amount equal to the spending of a household earning the median U.S. income.
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File For A Homestead Exemption
The homestead exemption can be used on primary residences as a way to lower property taxes. The exemption essentially protects homeowners up to a certain amount or percentage of their annual property taxes. The exact exemption amount depends on your state. For example, in Colorado homeowners may be eligible to exempt up to $75,000 of their home.