We are now in 2020 with the 2018 tax year and it’ issues far behind us. For months there was bad information around the the new tax law would hurt mot people. The results are in. With the exception of some who live in high tax states, most people either earned a refund of close to what they had in previous years or broke even.
It’s amazing what a year will do. People are not even talking about 2018 anymore. Even those who were screaming about the loss of deductions due to property, sales and state income taxes either moved to another state or have it taken it in stride.
Most people did in fact benefit in some way from the tax bill and not the lease were employees of companies that paid out bonuses and increased wages with the savings that the company earned from the business tax reduction. The net result is that most have more money to spend.
$10,000 cap on state and local tax deductions
So you either live in a high cost state or your income is very high compared to the national average. Perhaps your property taxes alone are at or greater than $10,000 per year. I have found that if the property taxes are greater than $8,000 per year, the income to support a mortgage payment is high as well. A $10,000 property tax bill may indicate you are paying state taxes in excess of $10,000 as well.
There is no need to reduce your income in order to pay less (ha, ha). You could move to a smaller home and reduce your property taxes but that’s unlikely to affect the mortgage payment much in a high cost state. So what do you do?
Consider moving. Yes, moving. This may seem to be a drastic thing to do but you would not be alone. The news has been full of the New York State governor talking about how the richest people pay 1/2 of the entire state’s budget. The top few percent in CA pay most of the state’s bills as well. While you may not be in the top 2 or 3%, you may actually be in the top 15-20% if you are paying $10,000 in annual property taxes.
Some states have very low effective state taxes or zero state taxes on income. To reference recent articles, people in CA and NY are moving to some of these states to avoid excessive taxation.
As it happens, the outmigration to other states is the highest from CA, NY, IL and other states with oppressive tax structures. So there must be something to the idea of becoming a tax refugee. But you say, “moving, that’s extreme”.
Perhaps not. Income taxes are going up, no doubt about that. In fact as your income goes up you may be moving up to a new tax bracket in your state. Look at your state expenditures, are they going up faster than inflation? Is the state and local public workers pension fund short by billions of dollars?
Moving may save you from a few percent of your income to zeroing out state income taxes entirely depending upon the state you are interested in moving to. But local and state income taxes just hit the surface of your savings if you relocate.
Property taxes while reasonable in some states on a percentage of value basis, the total dollar amount is based upon the value of your home. If you are living in a home valued at $800,000 which in some states is an ordinary tract home, you are paying at least $8,000 per year in property taxes. One of the issues with property taxes is the addition of bonds which are added with regularity in some areas.
For example in California, the average property tax is 1.1% plus bonds. People seem to vote for bonds as if they were not going to pay for them. You open your tax bill and find yet another good cause exacting $100 more per year and so it goes. CA among some other states will raise your tax rate every year by x percent unless the economy takes a hit and property values drop drastically.
Consider if you could buy a comparable home in size and situation in another state for 1/3 the price if your current home. That means that your property taxes would drop as well by roughly 2/3. If you make a good choice for your new home, the area you select will have a history of containing property tax increases to a once in every few years evaluation and few if any bonds.
Example of moving to lower cost area
Here is an example of moving from for example NY, CA, IL or other high tax state to a state with lower costs. I used two properties, one in Garden Grove (Orange County) CA, a tract house and a custom house in Biloxi, MS. The selling prices are close to the example math. Pay attention to the size of both properties:
Existing home in high tax state:
- Existing home value = $800,000
- Existing home property annual property tax: $8,800
- Annual household income: $150,000
- State taxable income after deductions: $120,000
- State income tax (effective 8%): $9,600
- Total state taxes paid: $18,400
- Over federal tax threshold: $8,400 not deductible on federal tax return
New home in another lower tax state:
- Home value $266,000
- Annual property tax: $2,660
- Annual household income: $150,000
- State taxable income after deductions: $120,000
- State income tax (effective 4%): $4,800
- Total state taxes paid: $7,460
- All taxes fully deductible with $2,540 to be used on sales tax deductions for vehicle purchase etc.
By moving in this example, you would have seen a yearly increase in spendable income of $10,940 at minimum. This would pay the cost to move a typical home in year one.
Consider that if the price of the home and taxes are lower than other things my definition should be lower as well e.g. fuel, food, utilities etc. High income tax states usually but not always have high taxes on other things as well.
In this example, a move 10 years prior to retirement would allow you to save another $109,400 (plus as your wages go up) towards your retirement and you would be well positioned to retire in-place. This assumes that you can retain your income after moving. Even if you had to take a pay cut you can calculate that your net income may not be affected.
Where is this place?
The area that I used for comparison is one that I am familiar with. Before I tell you about the area you should know that I have lived in several states including California. I understand your pain with regard to taxes. I understood what i just wrote about well in advance. I purchased my home in this new state several years ago with the intent of moving. The tax law came along later. Fortunately for me, I was able to move before the law changed
I moved to the beautiful Gulf Coast of Mississippi. With beaches, great weather, fewer people, no traffic, low taxes, I was able to buy my dream home. Our highest state tax is 5%. Yes there are a few states with lower or zero state taxes but they do not come along with the same low cost of housing and everything else.
If you are over 65 in this state, you may as little as 6/10 of 1% of the actual value of property in local taxes. This means that the example home above at $266,000 would cost you $1,600 in property taxes. By the way, the median home price along the coast is only $170,000 so I used a much higher cost example.
At this writing, we are paying the lowest price for gas in the nation. Food pries are lower as are prices for most other things as well. A great benefit that I have taken advantage of is sales tax on vehicles at only 5% compared to 8% in CA. Also, the trade in value is deducted before the state applies the tax rate which saves a bundle.
The point if this article is not to steer you to the Mississippi Gulf Coast for your new home. While we would live to have you come here and live, there are other areas that have not been over developed due to recent hype e.g. TX, FL, ID, CO. If you are looking around consider what caused taxes to rise in your current area. People who mean well but want more and more services provided by government.
Those services cost and that leads to higher taxes. Also, some people tend to follow the well worn path of others without regard to the future. Some of the places that were nice to relocate to years ago are now over crowded, the crime rate is rising, cost are going up. For some who just followed their neighbor, they have found that the area they are in resembles where they came from,
Take a good look at the area you plan to move to. What is the tax policy, are the schools providing a real education and are adequately funded. Are the pensions funds in the area fully funded. Does the state and local area have a history of tax increases? Are newly arrived demanding more services?
I live on a Bayou with a boat dock and access to the Gulf of Mexico. Every morning I wake to a view of trees, grass, bayou (like a river) and usually nice weather. What a change from crowded freeways, oppressive taxes and rising crime. Oh, and by the way, I have saved a “boat load” (we all have boats here) of money on taxes.
