Soon you will be filling out your federal tax forms, and unless you are lucky enough to live in seven states, you will be filling out state tax forms as well. Are you fortunate enough to live in one of these seven states, or are you on the other end of the spectrum, dealing with some of the highest state taxes in the nation?
Every year, the Tax Foundation and Kiplinger produce maps to compare the tax burdens across the states. Between the two, they contrast everything from income taxes to "sin taxes" such as alcohol and cigarette taxes.
For the 2017 tax year, California leads the list of highest state taxes with the top bracket of 13.3% for those in the $1 million and above bracket ($1,074,996 for married filing jointly). However, California also has 10 brackets ranging from 13.3% down to 1% based on income.
The remaining nine states/districts in the top 10 marginal income tax rates are Oregon (9.9%), Minnesota (9.85%), Iowa (8.98%), New Jersey (8.97%), the District of Columbia (8.95%), Vermont (8.95%), New York (8.82%), Hawaii (8.25%) and Wisconsin (7.65%). Note the concentration in three areas: the West Coast, the Northeast, and the Upper Midwest.
On the other end of the spectrum, these seven states have no state income tax at all: Alaska, Washington, Nevada, Wyoming, South Dakota, Texas, and Florida. Two others, New Hampshire and Tennessee, only tax income on dividends and interest. The lowest tax rate of any state that does levy a state income tax is in North Dakota, with a 2.9% rate that kicks in at $416,700 in income. We'd be happy to be charged that tax!
With respect to an overall state tax burden, Kiplinger finds these 10 states to be the most tax-friendly:
- South Dakota
- North Dakota
Keep in mind that a low income tax does not necessarily mean a tax-friendly state. State budgets have to get their money from somewhere, and shortfalls in one type of tax will generally be recouped in another. A state that is tax-friendly to you may not necessarily be tax-friendly to others.
For example, Illinois is considered one of the 10 least tax-friendly states because not only did it raise its relatively low flat income tax from 3.75% to 4.95% in July 2017, it also has high taxes in almost every other category. Average combined sales taxes (state and local) are 8.64%, the seventh highest in the nation. Property taxes are the second highest in the nation.
Travel taxes, sin taxes, fuel taxes, and vehicle taxes are also significant in Illinois — not to mention a 24.59% tax on wireless services. Given the state's difficult budget deficit situation (largest in the U.S. according to Kiplinger), the odds of these taxes decreasing in the future are pretty slim.
High earners are likely to prefer a state with no taxes or a relatively low flat tax rate, such as Pennsylvania's 3.07%. Low-income Americans will prefer states with highly graduated income taxes and/or lower taxes on day-to-day consumption (such as sales taxes and fuel taxes) to avoid paying a disproportionate share of the state's tax burden.
While you probably aren't going to move based on the collective tax burden in your state, it's good to see how your burden compares to that in other states, and where the money is going. You can then hold your politicians accountable. Is your tax burden reasonable, and are you getting sufficient value for your tax dollar? If not, let them know with letters and e-mails — and, if necessary, at the ballot box.
If you itemize your federal income taxes, you may claim either state and local income taxes or state and local sales taxes (but not both income and sales taxes). This tax season, you can claim the total amount of sales taxes you actually paid if you saved all your 2017 receipts. Beginning in tax year 2018, the Tax Cuts and Jobs Act has limited the total deductible amount of state and local taxes (including property tax) to $10,000.
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