Lowering your state tax burden: you will be surprised at the size of the benefits

Since we've all just finished our taxes, well, we couldn't resist...

Taxes make a huge difference in your personal financial picture, and it's worth taking a look at the burden that the 72,000 page federal & state tax codes place on you, your retirement, and your estate. State taxes add to considerable burdens, which we don't need to tell those in CT, NY, NJ, CA, etc. They never stop, even when you die.

Those thinking about retirement or relocation should pay attention. There are material & significant benefits to be had by arbitraging state taxes... yes, moving. 

We present some informational resources that caught our attention. Art Laffer in this video, Laffer: Save Taxes By Moving outlines some simple examples where the savings on state income taxes alone can add $500,000 to $1,000,000 to your retirement funds over time. You can visit his state tax calculator to explore particular options.

A bit of anecdotal data to focus the mind & wallet: if you compare the property taxes on a relatively nice house in a good area in a high tax state, say Connecticut, to a comparable house in say, South or North Carolina or Texas, you may find annual savings ranging from $9,000 to $12,000 or more ... just in property taxes alone. That would be on top of Mr. Laffer's findings on income tax savings. Do you think this phenomena will impact future real estate values in high tax states? We do.

For a slightly broader view take a quick look at These Are America's Most And Least "Taxing" States (And Everything Inbetween). It broadens the view to include the aggregate  burden of sales and property taxes. And here, Annual State-Local Tax Burden Ranking FY 2011, the most recent of theirs we could find.

Of course, the 2014 State Death Tax Chart published by the American College of Trust and Estate Counsel is a must. Check it out. We like the ones with "None", don't you? That, by the way, represents the entirety of our estate tax wisdom.

Lastly, pay attention to two other important variables that impact current and future taxation at the state level: funded and unfunded liabilities (mostly pensions). Higher levels likely evidence fiscal irresponsibility and in our view are predictors of higher taxes in the future.  Where might you find such data? Well, our posting of July 15, 2011  referencing The Revenue Demands of Public Employee Pension Promises  ... from which the chart below is taken may be a good start. It benchmarks states by funded debt and unfunded liabilities to Gross State Product.

Accumulated Benefit Obligation (ABO), essentially equals the present value of what would be owed if the pension plan were then frozen and workers did not earn the rights to any benefits beyond what they would be entitled to based on then existing service and salary. For other details you'll have to read the whole article, but our take on debt & pension liabilities at the state level is short: left and low is better than high and right.

Please note the paper from which the chart was drawn was published in 2011, so while it may be a bit dated we believe it is close enough for government work, so to speak.  

We provide these sources in the hope of inducing a few back of the envelope calculations. You will quickly find that there are a lot of bananas on this table. Your bananas, in fact.

Lastly, we don't render legal or tax advice and strongly suggest interested readers seek competent tax counsel on tax matters. 

Update on Tuesday, July 22, 2014 at 03:09PM by hb