Where middle-class taxes are highest, lowest
One legacy of the pandemic is that many people will be able to work from home permanently. That has compelled some workers who are no longer tethered to the office to consider moving.
But if you’re contemplating moving your family across state lines, consider how state and local taxes will affect your bottom line.
Moving from a low-tax to a high-tax state could cost you thousands of dollars a year.
To help families make smart choices, Kiplinger.com has looked at the overall income, sales and property tax burden in each state for a hypothetical married couple with two children, $77,000 in combined wages, $3,000 of other income and a $300,000 home.
Most friendly
1.WYOMING
State income tax: none
Average combined state and local sales tax rate:
5.32%
Wyoming’s generous revenues from mineral and energy extraction allow it to keep taxes on residents low across the board.
2. NEVADA
State income tax: none
Average combined state and local sales tax rate: 8.23%
Along with no income tax, Nevada has the fourth-lowest average property tax rate in the country. But the combined sales tax is the 12th highest in the nation, according to the Tax Foundation.
3. FLORIDA
State income tax: none
Average combined state and local sales tax rate: 7.05%
Florida’s income tax rate of zero keeps state taxes low for middle-class families, but property taxes and sales taxes are about average for the country.
Least friendly
1. ILLINOIS
State income tax: 4.95% (flat) Average combined state and local sales tax rate: 8.8%
Illinois’s income and sales taxes are above average for middle-class families, and its property taxes are the second highest in the country.
2. CONNECTICUT
State income tax: 3% to 6%
Average combined state and local sales tax rate: 6.35%
Sales taxes in Connecticut are reasonable, but income taxes for middle-income families are on the high end, and property taxes are the third highest in the nation.
3. IOWA
State income tax: 0.33% to 8.53% Average combined state and local sales tax rate: 6.94%
Iowa’s income tax on our hypothetical family is the third highest in the country, and property taxes are above average, too.
Rocky Mengle is tax editor and
David Muhlbaum is senior online editor at Kiplinger.com.
Q: A surviving spouse who inherits an IRA can either roll it over into a personal IRA or retitle the account as an inherited IRA in his or her name. Which one is better to do?
A: It really depends on how old the surviving spouse is when inheriting the IRA and how soon the money might be needed. Keeping the money in an inherited IRA allows a cash-strapped spouse younger than 59 ½ to access those funds without incurring the 10% penalty for early withdrawals, though taxes would still be owed. Unfortunately, required minimum distributions also come with the territory.
A spouse who is unlikely to need the money before age 59 ½ or who is already past that age is better off rolling the funds into a personal IRA. That way, the money can continue to grow, with no distributions required before age 72.
A young surviving spouse could also start out keeping the money in an inherited IRA and roll it over into a personal IRA after turning age 59 ½ , says Bob Foland, a certified financial planner with The IRA Specialists in Centennial, Colorado. That might be a good compromise for a spouse who wants to preserve ease of access in their younger years, because once the money is rolled over from an inherited to a personal IRA, you cannot roll it back.
Q: My wife and I will each pay a monthly Medicare Part B premium of $475.20 this year. We file a joint tax return. Most of our income comes
from investments in my name only. Would it make sense for us to file separate tax returns to lower our collective monthly premiums?
A: It doesn’t pay to file separately. In fact, it’s likely to cost you more in income taxes without changing your current premium. Couples start paying $475.20 each in 2021 when their joint 2019 income hits $330,000. (Medicare bases premiums on income two years prior.)
A married couple filing separately each pays the same premium starting at a much lower income — $88,000. Meanwhile, something similar happens on your federal tax return, with higher tax brackets ensnaring you at lower incomes if you file separately, and you also sacrifice any tax credits and deductions for married couples.
A better solution: Ask an accountant for ways to lower your modified adjusted gross income to reduce your Medicare premium.