I wasn't able to get my regular newsletter out last week because my parents flew down from Pittsburgh, and we were all caught up in family holiday fun. Senay was home too, so we had a full house of cheer (mostly!).
My youngest, Jesse, and I decided to build a home gym so we can start working out together. We're putting together a solid setup of the essentials: pull-up bar, bench, barbell, and dumbbells. We're also fixing up the garage to make it a bit more conducive to exercising. Let's be honest, it’s not exactly inviting right now, so we're adding some motivational posters and better lighting. And of course, we need a mirror for those all-important flexing moments!
Last weekend was the annual Sarasota Orchid Show and Sale at the Sarasota Municipal Building. I was quite nervous because it was my first time entering a flower into the competition. Some fellow orchid society members came over to help spruce up my plant. You have to stake the flowers, clean the leaves, and polish the pots. It has to look its best! Below, you can see the results (blue means first place!).
Grandpa loves Chris's new drum set.
I don't like taxes, do you? But it's the new year, and we need to remind ourselves of the ins and outs as best we can. Even though it's not the most exciting topic, being knowledgeable about taxes can be quite empowering. So, let’s dive in!
In this country, we have a progressive federal tax system. Earned income—money you receive from your job—falls within seven tax brackets: 10%, 12%, 22%, 24%, 32%, 35%, and 37%.
For instance, the 22% tax bracket kicks in at $89,451 if you’re married. Here’s a common misconception: if your income is $89,452, you only pay 22% on that one extra dollar. From $22,001 to $89,451, you pay 12% on that portion, and you would pay 10% on the first $22,000 you earn.
Many clients are terrified that they might unintentionally land themselves in a higher tax bracket, leading to a substantial tax increase. But that’s not how it works! If you take out a little extra from your IRA and dip into the next tax bracket by $5,000, it's not a huge deal. You only pay extra taxes on that $5,000.
Now, let’s talk about other taxes that may affect you during retirement.
State income tax! I think we all have a basic understanding of this one. Alongside federal taxation, many states impose an additional state tax. Us Floridians are the lucky ones here. Only a handful of states have no state tax—Florida, Texas, and Tennessee being the most notable. In contrast, New York’s state tax is 10.9%, and California's is a whopping 13.3%!
Probably the biggest tax factor during retirement is whether IRAs and 401(k) distributions are taxable. It can be frustrating that some states require individuals to pay taxes on their retirement distributions in addition to federal taxes. For those living on a fixed income during retirement, it feels like an unnecessary burden. Once again, Floridians have it good. While most states impose this tax, Florida, Texas, Tennessee, Pennsylvania, and Washington do not (plus a few smaller states). Some retirees migrate from New York to Florida just to escape state taxes on their IRA distributions. I get it.
Next up, property taxes. This is less than ideal for Florida. Given that Florida has relatively few taxes elsewhere, they have to find revenue somewhere. In Florida, property tax can range from 1-3% of the home's assessed value. Texas, Illinois, and New Jersey lead the pack in high property taxes, while states like Alabama and West Virginia can be closer to 0.6%. And remember, your tax burden varies not just by state but by region within the state too.
Sales tax! As you might already know, Florida has a 7% sales tax. A significant portion of the state’s revenue comes from this tax (thanks, tourists!). Luckily, groceries, prescriptions, and baby items aren't taxed. Florida’s sales tax is pretty middle-of-the-road. Texas is at 8.2%, California at 8.85%, and Tennessee at 9.55%. Interestingly, five states have no sales tax at all: Delaware, Montana, New Hampshire, Oregon, and Alaska.
Now let’s talk about estate and inheritance taxes. If you pass away with more than $12,000,000, you’ll face a federal estate tax starting at 18% and climbing to 40%. But many states have their own regulations when it comes to death taxes, which can get a bit complicated.
State inheritance and estate taxes are separate entities, and often, the thresholds differ from the federal standard. In Florida, there’s no inheritance tax. Also, if you die here, there’s no state estate tax. However, in some states, even if the deceased lived outside the state, you may still owe inheritance taxes if you receive an inheritance. Pennsylvania, Kentucky, Nebraska, and Iowa are a few states that impose such taxes.
Estate taxes are another matter. Some states require estate taxes if you die there, including Washington, Oregon, Minnesota, Illinois, New York, Vermont, Maine, Massachusetts, Rhode Island, and Hawaii.
As an example, if your parents pass away in New York and you inherit their money while living in Florida, the estate is taxed in New York, but you’re off the hook for inheritance taxes in Florida (confused yet?). However, if you live in Pennsylvania, you’ll need to deal with estate taxes in New York and an inheritance tax in Pennsylvania (not cool!). And don’t get caught in Maryland—the only state with both an estate and an inheritance tax.
Gas taxes are also fascinating due to the vast differences by state. California and Pennsylvania have the highest gas taxes at 51 and 57 cents per gallon, respectively, while Alaska boasts the lowest at just 8 cents per gallon. Florida's gas tax sits comfortably in the middle at 26 cents per gallon.
On top of that, Florida raises a lot of revenue through a tourist tax on hotels, ranging from 2-6%, depending on the municipality.
Lastly, we have stamp or real estate transfer taxes, which vary significantly from state to state. States like Pennsylvania, New Hampshire, Delaware, and Washington have high stamp taxes, resulting in considerable expenses when buying or selling property. Conversely, eleven states, including Texas, Alaska, Indiana, North Dakota, and New Mexico, have no such taxes at all."
Be blessed,
Dave
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