Ever feel like no matter how hard you- and possibly your spouse- work, you never seem to get your head above water financially? You know you need to save for retirement but can't because there’s not much left over after you pay your expenses each month. And, no, you don’t splurge on choca-mocha soy lattes every day or have a shoe-buying addiction. 

Well, maybe it’s not your spending habits at all.

Maybe it’s because of where you live.

WalletHub.com, a website that provides financial tools for consumers and small business owners, compared the complex and sometimes bizarre array of state and local taxes that residents face across the country. One surprising conclusion: politics matter. If you live in a state that tends to vote “Democrat” in national elections, on average, your total state and local tax bill will be more than one-third higher than someone who lives in a Republican-leaning state. (For a complete state-by-state rundown, click here)

Another interesting tidbit: four out of the top five states with the lowest tax burdens are located out west: Wyoming, Alaska, Nevada and South Dakota. (Florida ranks fourth.)

In order to make the comparisons, WalletHub created a composite of the “average” taxpayer who earns the median national income, owns an average-priced home ($200,000), drives a Toyota Camry (the No.1 selling car), and spends an average amount on gasoline and food. If this individual lived in Wyoming, she would pay $2,365 in state and local taxes each year- $7,353 less than if she lived in New York State and 66% less than the national average.

Even if you look at a less extreme example, the tax burden differential is significant. Take Colorado (the 10th-lowest tax state) and Maine (ranks 42): Both states offer mountains, snow, and plenty of activities for folks who enjoy the great outdoors. But the average Colorado resident will pay $5,674 in state and local taxes- 19% less than the national average and nearly $3,000 less than if he lived in Maine. 

Population density doesn’t seem to be a factor. In fact, the “average” tax burden for a resident of Vermont ($8,838) is slightly higher than that for someone living in New Jersey.

For many of us, work dictates where we live. Or perhaps it’s the proximity of family members. But if you’re weighing whether to accept a new job in a different state, or perhaps re-locating in retirement, you need to do your homework. Otherwise, you could find yourself with a much lower standard of living than you expected. 

In addition to the wide variation in the amount of tax paid, WalletHub analyst John Kierman was struck by “how complicated state, country and local taxes are. There are different rates for everything!" What’s more, jurisdictions use different names for the same taxes.

“It hurts the consumer’s ability to comparison shop” when it comes to decisions about where to live, he says. “People are making big mistakes.”

By far, the level of state income and local real estate taxes have the biggest impact on your total tax bill. But you could have a rude awakening if you just consider these two factors. As Kierman points out, states like to use “No state income tax!” as a marketing tool to attract businesses and new residents. The problem is, the money’s got to come from somewhere, so other taxes need to be higher.

Take Texas which, like six other states, has no income tax. Kierman likens it to “a credit card that offers 0% interest. You see them making up for this in other costs, such as high property and sales tax.”

Largely due to the fact that it, too, has no income tax, Florida boasts the fourth lowest overall tax burden. However, it has an “intangibles” tax- a tax assessed on money held in bank accounts and in investments. The WalletHub research didn’t take this into account because it’s so unique, a perfect example of what Kierman calls “the complexity of state and local tax codes. It makes it hard for taxpayers to compare.” 

Real estate taxes are the second-biggest factor to consider. Based on owning a $200,000 home, the study found that property taxes can range from $400 to 3,000 per year.

Did you know that Pennsylvania residents cannot deduct the money they contribute to an IRA or company-sponsored retirement plan? Instead, pension and 401(k)-type assets are not subject to state income tax when they are withdrawn (and have presumably increased in value). The same is true in Mississippi. In addition to pension income and retirement distributions, these two states also do not tax Social Security benefits.

Kierman says the research “is aimed at giving people a sense of how state and local tax codes stack up and how much the tax burden changes” based upon where you live. He admits it isn’t perfect, pointing out that “some states might have lower taxes because they get a ton of federal funding.” Still, he says, the rankings are “a reminder of how much money can be in play.”

Of course, it’s not just about money. Quality of life is also important. Those cold and windy Wyoming winters aren’t for everyone. Although Mississippi has the 15th lowest total state and local tax burden, it leads the pack with the highest tax on food (7%). Moreover, its standard of living is the 10th lowest in the country. And, there is only one place on the planet where you can get New York pizza or peruse the starlets on Rodeo Drive, assuming these things are important to you. 

Which is the real lesson here: look before you leap to a new state. The taxes you will incur depend upon your individual circumstances and lifestyle. But if you like keeping more of what you earn, a good place to start is to “Think red.”

 

Ms. Buckner is a Retirement and Financial Planning Specialist and an instructor in Franklin Templeton Investments' global Academy. The views expressed in this article are only those of Ms. Buckner or the individual commentator identified therein, and are not necessarily the views of Franklin Templeton Investments, which has not reviewed, and is not responsible for, the content. 

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