February 23


Tax Trek Through America


My son, Alex, and daughter, Senay spent the past week up north in Pennsylvania. The trip was planned so that my daughter could check out Penn St, where my father, grandfather, and I attended. We wanted her to experience a true Penn State winter to manage her expectations.

When I was a student, the campus was beautiful until halfway through November, and then it turned gray and frigid until April. My memories of Penn State were one long freezing walk to class. But luckily, the weather was warm, and it even snowed on the third day of their visit! It was their first time seeing snow, and they had a snowball fight and made snow angels.

My niece is currently attending Penn State, so they got an insider look at campus life. We texted Alex to ask how he liked it, and he replied with just a few words: "Brick. Cold. Big."

"I don't like taxes, do you? But we must understand them as best we can. Even though it's not fun, having knowledge about taxes can be empowering. So, let's dive in!"

In this country, we have a progressive federal tax. Earned income - income you receive from your job - is measured against seven tax brackets: 10%, 12%, 22%, 24%, 32%, 35% and 37%.

For instance, the 22% tax bracket starts at $89,451 if you are married. This is the misconception: if your income is $89,452, you only pay 22% on the one dollar. From $22,001 to $89,451, you pay 12% on that portion. You would then pay 10% on the first $22,000 you make.

Many clients are terrified they may put themselves in a higher tax bracket by mistake, causing a massive tax increase. That’s not how it works. Taking a little extra out of your IRA and putting $5000 into the next tax bracket is not a big deal. You only pay extra taxes on that $5000.

Let’s move on to more taxes that may affect you during retirement.

State income tax. I think we all have a basic understanding of this one. In addition to federal taxation, many states assess an additional state tax. We Floridians are the lucky ones. Only a few have no state tax, Florida, Texas, and Tennessee being the big ones. New York’s state tax is 10.9%, and California is 13.3%!

Probably the biggest retirement tax factor is whether or not IRAs and 401k distributions are taxed. It is frustrating that some states require individuals to pay taxes on their retirement distributions in addition to federal taxes. It seems like an unnecessary burden, especially for those who may be living on a fixed income during retirement. Again, we Floridians are lucky. Most states assess this tax, but Florida, Texas, Tennessee, Pennsylvania, and Washington do not (plus a few smaller states). Some retirees come from New York to Florida just to escape state taxation on their IRA distributions. I don’t blame them.

Next comes property taxes. This one isn’t so great for Florida. Since Florida assesses so few taxes elsewhere, they must get revenue from somewhere. Florida taxes anywhere from 1-3% of the home's assessed value. Texas, Illinois, and New Jersey are the highest by far. Alabama, West Virginia, and a few others are closer to 0.6%. Of course, not only is it the state, but what part of the state that will determine your tax burden.

Sales tax. As you may already realize, Florida has a 7% sales tax. A huge portion of the state's revenue comes from this tax (much of it comes from tourists). Groceries, prescriptions, and baby items are not taxed. Florida is pretty middle-of-the-road in this category. Texas is 8.2%. California is 8.85%, Tennessee is 9.55%. Five states have no sales tax: Delaware, Montana, New Hampshire, Oregon, and Alaska.

Estate and Inheritance taxes. Anyone who dies with more than $12,000,000 must pay a federal estate tax starting at 18%, which quickly moves up to 40%. But many states also change taxes when you die. This gets kind of complicated.

State inheritance and estate taxes are separate, and oftentimes, the threshold is lower than the federal standard. In Florida, if you receive an inheritance, there is no inheritance tax. If you die here, there is no state estate tax. But in some states, you must pay taxes on an inheritance, even if the deceased person lives outside the state. You must pay an inheritance tax if you get an inheritance and live in Pennsylvania, Kentucky, Nebraska, or Iowa.

The estate tax is different. In some states, if you die in that state, you must pay estate taxes. They include Washington, Oregon, Minnesota, Illinois, New York, Vermont, Maine, Massachusetts, Rhode Island, and Hawaii.

For example, if your parents die in New York and you get their money while living in Florida, the estate is taxed in New York, but you do not have to pay inheritance taxes in Florida (confused yet?). If your parents die in New York and you live in Pennsylvania, estate taxes must be paid to New York, and then you must pay an inheritance tax in Pennsylvania (no fair!). Maryland is the only state with an estate and inheritance tax (don’t die there). Plenty of older wealthy families have moved to Florida, not for the weather, but to escape these taxes.

Gas Taxes. It's interesting to see the wide range of gas taxes across different states in the US. California and Pennsylvania have the highest gas taxes at 51 and 57 cents per gallon, respectively, while Alaska has the lowest at only 8 cents per gallon. Florida's gas tax is in the middle at 26 cents per gallon.

Florida also raises a lot of revenue using a tourist tax on hotels. This tax is 2-6%, depending on the municipality.

Stamp or real estate transfer taxes are yet another example of how taxes can vary significantly from state to state in the US. States like Pennsylvania, New Hampshire, Delaware, and Washington have high stamp taxes, which can add up to a significant amount of money when buying or selling a property. On the other hand, eleven states, including Texas, Alaska, Indiana, North Dakota, and New Mexico, have no stamp tax at all.

You have to start wondering if there is anything we do that isn’t taxed. Unfortunately, it is relatively common to see tax increases and extremely rare to see tax cuts.

Of course, taxes in many European countries are far higher, so I guess we should be grateful. I don’t know, though; I’m having a hard time feeling grateful on this one.

Be Blessed,


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