If you and your family are deciding where to put down roots in the ol’ US of A, one of the main considerations may be cost of living. How much will housing cost in each state? How much will groceries be? What is the price of car insurance?
Cost of living, however, can have just as much to do with state taxes as it does with upfront, sticker prices. Examples of state taxes include charges like income tax, property tax, and sales tax — extra costs that can dramatically change one’s cost of living by reducing take-home pay.
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So how much do state taxes affect your cost of living? And could it be worthwhile moving across state lines? James Brower, certified public accountant (CPA) and managing director at CBIZ, helps break this down.
Income Tax
Income tax is a government-levy on financial income; one’s percentage owed varies by state and income level.
“A well-paid executive living in New Jersey who pays at 10.9% state income tax rate on a significant portion of his salary could save approximately $120,000 in state income taxes by moving to Pennsylvania, where the state income tax rate is just over 4% in most areas,” Brower stated. That’s a significant chunk of change.
Many individuals are drawn to states like Florida, Tennessee and Texas because they do not tax individual incomes at all.
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Sales Tax
However, Brower is quick to point out that states with low-to-no income tax tend to levy taxes in other ways. For instance, while Tennessee does not charge income tax, they charge some of the highest sales taxes in the country at an average combined state and local rate of 9.61%. This consumption tax applies to everyday goods and services like clothing, electronics, cars and furniture.
If someone purchased a $30,000 vehicle in Tennessee versus New Hampshire (a state with no income tax), they’d pay over $2,800 more for the same car. Rinse, was, repeat for all retail items.
Property Taxes
Property taxes are levied on land, buildings and personal property to fund local services. Rates vary by location and tend to be higher in states with no income tax. For instance, while Texas has zero income tax, the state has some of the highest property taxes in the country, averaging around 1.68% to 1.81%.
Owning a $200,000 home in Texas versus Hawaii (0.27% to 0.31%) would cost roughly $3,000 more annually in property taxes alone.
The Big Picture
All taxes should be considered in budgeting and financial planning. While high-earners may benefit from living in states with low-to-no income tax, low-income earners may actually fare better in states with modest income taxes. This is because lower sales and property taxes won’t consume as large a percentage of their income.
Understanding your “full picture will help you make an informed decision about whether relocating to a low-tax state, truly reduces your real cost of living or simply shifts the expenses into different categories,” Brower concluded.
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This article originally appeared on GOBankingRates.com: I’m a CPA: Here’s How State Taxes Change Your Real Cost of Living
