Taxes can be a major consideration in your military transition planning. As I outlined in a previous military pension article, your take-home pay can be up to 40% less than what you see on paper. Federal taxes are obviously a significant part of that equation. However, there are several ways in which state taxes (and local taxes) could play a part in your relocation decision.
State Tax Consideration #1: State Income Tax
State income tax is probably the biggest consideration most people think about. After all, state income tax can range from 0% to 13.3%, based upon your income tax bracket and which state you live in. You can find more information on this state income tax resource page. While most military personnel don’t expect to transition into a job where they’re paying into their state’s highest marginal tax bracket, it’s important to have a good estimate and figure out where you stand.
If you’re moving into a state with income tax, you may want to familiarize yourself with state tax returns. Some states have a straightforward process for calculating tax liability (few deductions, tax tables, etc.). Other states have a complicated process for:
- Calculating taxable income
- Determining deductions
- Calculating tax liability
State Tax Consideration #2: Local Income Tax
It’s not enough to think only about your state income tax, because you might live in an area where county or local income taxes are common. For example, in New York City, a married couple filing a joint return earning $50,000 per year would be in the 3.591% tax bracket. This is in addition to New York state taxes as well as federal taxes. While there are relatively few cities that charge income tax, you should know what you’re getting into.
State Tax Consideration #3: State & Local sales tax
Most states charge a sales tax, and many cities charge an additional sales tax as well. There are a couple of things to look at here:
- What items are taxed: Usually, taxes are not levied on items like groceries and other consumer ‘must-have’ items. Also, most states will have tax holidays for special occasions, such as ‘back to school.’ However, if you indulge in things such as tobacco and alcohol, you might face stiff taxes as many municipalities look to make money from ‘vices.’ In some cities, the widely regarded sugar tax looks to start a similar trend for soda products and other ‘unhealthy foods.’
- Tax deductibility: The IRS allows a taxpayer to deduct the greater of state & local INCOME tax or state & local SALES tax. This is done by itemizing those deductions under Schedule A (taking the standard deduction disallows either tax for deduction purposes). In states with zero income tax, this is a no-brainer…you can always take the sales tax. However, for people with both sales & income tax, this might require calculation and tax planning on major purchases.
For example, a major furniture upgrade or entertainment system installation might warrant a close look at your tax situation. In some circumstances, it could be worthwhile to look at the timing of a purchase to make sure you’re maximizing your tax deduction in the appropriate tax year.
State Tax Consideration #4: Real Estate Taxes
Most municipalities have sort of real estate tax assessment, either at the local or county level. A couple of considerations here:
- If you’ve never owned a home before, you’ll usually find that estimated taxes are calculated by the mortgage company. You’ll then pay these into an escrow account, and the mortgage company pays taxes on your behalf.
- Your real estate tax liability is calculated by the taxing authority. This is done by assessing the value of your home, then multiplying that assessment by the tax rate.
- Many localities or states have homestead exemptions for military or veterans. For example, in Florida, this ranges from a $5,000 exemption (knocking $5,000 off the home’s assessment) for partially disabled veterans to a complete waiver of tax liability for 100% disabled veterans who meet certain criteria. But you have to apply.
- If your taxing authority has suddenly raised the assessment or tax rate for your property, you may find that your escrow payments might not be enough. You can challenge the assessment. However, you should be prepared for your mortgage payments to go up in the following year if your mortgage company has to recoup the extra payments.
- Once you pay your mortgage, you’re responsible for paying your real estate tax. Make sure you incorporate this into your planning.
- You may deduct real estate taxes paid as an itemized deduction under Schedule A of your federal tax return. This is itemized separately from the sales OR income tax deduction (where you can only choose one). However, there are cases where the standard deduction may be more beneficial than itemized deductions. In this case, there is no real deductibility benefit for real estate taxes paid.
State Tax Consideration #5: Personal Property Tax & Registration
Many areas also have a personal property tax, either at the county or local level. Personal property taxes are usually charged against vehicles or other personal property that must be registered (ATVs, trailers, boats, etc.). Personal property taxes can be levied in a number of ways:
- Estimated fair market value
- Weight or length
- Type of equipment
There may also be other registration requirements, such as annual vehicle inspections or emissions testing. Without going into much detail, you may want to learn a little about how personal property works in the area you plan to relocate to.
While state and local taxes might not be the ‘deal-breaker’ in terms of helping you decide where to live, they are still worth looking at. When it comes to budgeting your post-military life, you may find a significant impact in terms of total tax liability. Simultaneously, you may also find tremendous tax planning opportunities, with just a little research.
If you want a clearer picture of how this impacts your overall financial picture, you may want to consult with a tax professional or fee-only financial planner in your area.