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Americans continue to seek affordability by moving to states with lower costs of living, and in 2023, income tax-exempt states once again topped the list for most inbound migration.
Texas and Florida, the two largest U.S. states with no income tax, added the most residents last year. According to the U.S. Census Bureau, from July 1, 2022 to July 1, 2023, Texas added 473,453 residents and 365,205 Floridians. Meanwhile, the two states with the highest state income tax rates in the country lost the most residents. In 2023, New York state will lose 101,984 residents and California will lose 75,423 residents, suggesting that state taxes play a large role in the decisions that move Americans.
Indeed, moving from a high-tax state can save you a lot of money in income taxes. A household with California’s median income of $91,905 would save nearly $2,843 annually by moving from California to a state with no income tax. But experts say there’s more to the calculation, including property taxes and real estate prices, not to mention less tangible quality of life indicators. It is said that there is.
In other words, it’s a value proposition, not a simple equation.
“When people compare stores, they don’t always buy the cheapest option. They look for value, and what they value may vary from person to person,” said the Tax Foundation’s vice president of national projects. President Jared Walczak told Yahoo Finance. .
Complete coverage: 2024 Taxes — Everything You Need to File Your Taxes on Time
Fixed asset tax should also be considered.
Residents of all states must pay some form of tax, even those states that have no income tax. Governments must somehow fund public welfare, education, infrastructure, and other services. Residents generally pay a combination of property taxes, income taxes, and sales taxes.
“You need money to build driveable roads,” Edvin Zybarzis, state and local tax partner at global tax services firm Andersen, told Yahoo Finance. “So if your state has a road, the governor didn’t pay for it out of his own pocket. [The money] It comes from taxes. ”
That means in places like Texas and Florida, residents typically pay higher property taxes to supplement revenue.
For example, the average effective real estate interest rate paid by Texas homeowners is 1.60%, compared to the national average of 0.99%. California homeowners pay an average effective property tax rate of 0.71%, but face state income tax rates ranging from 1% to 12.3%. For some Texas homeowners, the savings from not paying state taxes could be eclipsed by property tax hikes that are more than double those in California.
One tax expert highlighted two additional factors to consider when it comes to property taxes. The first is property value, which varies widely from state to state. The second is how the state values property. For example, in California he limits the annual increase in assessed value to 2% until the property is sold, while states like Texas tax the property at its fair market value.
”[It is] Red State Hidden Secrets: The Hidden Taxes You’ll Pay, and That Usually [rising] property taxes,” Gybarzis said, referring to Republican-led states that tend to favor low-tax policies.
The difference in tax treatment is most important when asset values are increasing. As long as real estate prices remain the same, residents won’t notice much of a difference whether they’re in a state with an assessment cap like California or a state with a fair market value like Texas. But as home prices rise, Texas property owners are likely to pay more in taxes.
In a comparison scenario of two separate households living in the state’s median-priced home and earning $60,000, a California family would pay nearly $2,600 more if property values were stagnant However, as property values increase, the amount you pay will decrease.
For example, a California family would pay $2,341 in annual state income taxes and $5,635 in property taxes at a rate of 0.71% in 2023 on a home with a median price of $793,700. A Texas family would pay no state income tax and $5,385 in property taxes. Their median home price is $336,600 and the interest rate is 1.6%.
However, the scenario changes for the same resident when house prices increase at a rate of more than 2% per year. Calculating the average historical home price increase of 5.4%, homeowners in Texas face annual home value appreciation increases, property taxes increase by more than $9,000 over 11 years, and homeowners in California This will exceed the individual’s income tax and property tax.
“If you look at real estate prices, prices are going up,” Jibarzis said. “That means you’ll save on income taxes, but your home will be adjusted to fair market value.”
Another thing to note is that California’s property tax treatment is disadvantageous for “growing households.” Young families and other first-time homebuyers are constantly faced with the challenge of paying high property taxes while also paying income taxes. Appraisal caps benefit long-time homeowners the most.
”[California’s system] “It severely skews the property tax burden by imposing very low property taxes on some people and very high property taxes on others,” Walczak said. Ta.
read more: First-time homebuyer programs: everything you need to know
So, should you move to another state?
Property and income taxes have a big impact on the cost of living, but experts recommend that anyone considering moving take a personal look at and balance the state’s overall value to them. Masu. After all, not everyone is looking for the same thing.
“I’d probably live in Wyoming because I want to live in the mountains, but not everyone wants to live in the middle of nowhere,” Walczak said.
Manhattan apartment rents are an example of the opposite. Although the Big Apple has some of the highest prices in the world, some people are willing to pay it because they love what the city has to offer and want to be right in the middle of it all.
Each state designs its tax system according to the current needs of the economy and the political objectives of its leaders. Texas, for example, is trying to foster growth, Walczak said. The Lone Star State’s non-income tax policy was intended to attract population and business to stimulate the economy.
“If you live in Florida or Texas or any other low-tax state, you actually pay less in taxes than you would in most other states,” Walczak says. “So some people may move to Texas because they want a good-paying job in an area with a lower cost of living.”
“And that’s just another way of saying that the tax system helps enable both of those things,” Walczak said.
What happens to those looking to escape the high cost of living?
Gibarzis said people earning average salaries should consider their personal tastes and preferences when considering where to move and should not base all decisions on state income taxes. Stated.
“If you make less than $250,000 a year, moving states is not a major tax consideration,” Gybarzis said. “Currently, it only makes sense to relocate if your net worth is between $5 million and more than $10 million.”
Rebecca Chen is a reporter for Yahoo Finance and previously worked as an investment tax certified public accountant (CPA).
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