[Editor’s Note: This is a republished post from Passive Income MD (PIMD), the newest member of The White Coat Investor Network. When a state like California or Oregon takes 9% or more in state income taxes it can cost you into the millions over a career. Obviously, that kind of money makes a big difference if going for early retirement. At least be aware of the financial implications of your job location choice. The original post ran here, but if you missed it the first time, it’s new to you! Enjoy!]
This is an interesting time of year as soon-to-be graduates of residency and fellowship programs start focusing on securing their “dream” jobs.
I remember my residency classmates (what seems like so long ago) interviewing all over the country and something that always seemed to come up (besides salary and call duties) was whether the state had state income taxes or not. I particularly remember that coming up in conversations about Texas and Nevada.
Training in California, we were often reminded by attendings that state income tax for a good number of physicians is close to 10%. I planned to stay in Southern California so it wasn’t a particular concern or differentiator for me. However, for some, it seemed to be a legitimate factor in choosing their jobs.
I was reminded of it again as my current fellows are beginning to dig deep into the job hunt. I heard the same phrase uttered again, “Well, you know Texas has no state income tax.” This time I couldn’t get it out my head and I had to take a look at what state income tax rates are currently at around the country.
Tax Burdens for Different States
This simple case study revolves around a married couple making $250,000, filing jointly, and taking the standard deductions (thus the effective tax rate). I used Smart Asset for the quick calculations and here’s what I found:
Key Points
- Seven states currently have no income tax: Alaska, Florida, South Dakota, Texas, Washington and Wyoming.
- For two states (New Hampshire and Tennessee) residents pay state income taxes exclusively on income earned from dividends and investments.
- Michigan and Massachusetts are the only states with a flat tax rate.
- The following states have tiers above $250,000, where rising incomes would trigger an even higher tax rate: AZ, CA, Conn, MD, Minn, NJ, NY, ND, VT, Wis, DC.
- At this income of $250,000, based on effective tax rate, Oregon residents actually have the largest tax burden. However, as incomes rise, higher tax rate hikes are triggered in California climbing to over 10% with a max tax rate of 13.3%.
How Much Impact Can It Make?
Obviously the more you make, the more you “save” in taxes by living in a state with no income tax. These savings can add up to quite a bit over time, especially if you factor in compounding gains.
For example all things being equal (which is a huge assumption I know), if you were to take the $17,227 tax burden in CA and not have to pay it while living in Nevada and invested that amount yearly at a 5% annual gain, here are the results: In 10 years that would amount to $255,574.29, in 20 years to $643,816.91, 30 years to $1,276,223.23. Pretty significant I’d say.
So Should You Choose Based on State Income Tax?
Obviously, this shouldn’t be the main determinant for anyone choosing a job, but it’s a factor that should be considered if your goal is early financial freedom. We’ve heard the Physician on Fire talk about geographic arbitrage, and if that’s a consideration for you, then state taxes should probably be considered as well. It’s also just nice to be informed especially when everyone is talking about it.
Best of luck to all those on the job hunt as we speak!
Did you consider state income taxes in your job choice?
Don’t forget the stealth taxes, many in the form of “fees”. In NY, I have to pay a fee for the privilege of owning an X-ray machine. I also have to hire a physicist to look at the machine every three years to certify that it is acceptable to the state. This started the very first time I bought the thing brand new. Regulations here are ridiculous and very expensive. I would tell anyone who has anywhere else to go not to come to New York.
Setting up a subcontractor practice in Texas after growing up in Pennsylvania I definitely felt like I was paying elsewhere for not paying income tax. As a part time doc I felt the licensing fees were based on getting from a full time doctor closer to what the state was missing out on in taxes. Wasn’t really that bad, but the higher costs to register cars, get MD license, and sales tax (on more things than in PA) made me doubt I was really saving. Also now living in a fairly low tax state, Alabama: the example for the $250K income may be off, since we get to deduct all fed taxes from state income, so richer folks sometimes (especially with no taxes on our government pensions but still able to deduct the fed taxes on those from our state income) pay a lower effective income tax rate than poorer. And with school aged kids and a wakening interest in politics I certainly see that my lower (mostly property) taxes here vs. PA or some ‘blue’ state pay for much less, leaving my kids and neighbors with pretty crappy public schools and most of my neighbors without a government or union job really struggling.
Yes, it’s pretty crazy there. Fun to visit, but you’d better really love it to live and practice there.
Didn’t really think about it knowing low income tax states usually had higher other taxes like real estate as you mention. Also, my specialty radonc doesn’t have tons of jobs so can’t always choose states.
Dr Curious wrote similar post on the topic of state taxes and retirement income:
https://mycuriositylab.com/state-confusion-location-matter-retirement-taxes/
I can say for certain that the state rate listed for Illinois is wrong. Imagine other states may be as well.
Illinois raised their tax last summer, and probably not enough to take care of all of those unfunded pension obligations! The chart or the data inputs probably haven’t been updated since then.
It may also depend on filing single versus married. For example, the marginal rate listed for Minnesota at a $250,000 income is accurate for a couple at 7.85%, but it would be 9.85% if the filer was single or if the couple made another $20,000.
Best,
-PoF
Illinois also has a flat tax rate. That is a benefit for high income physicians. All of the surrounding states have progressive tax rates and pay more.
Indiana is a surrounding state that has a flat tax rate. It’s also 3.27%, less than Illinois.
Always tough to keep 50+ pieces of data up to date. Remember these Saturday posts are being re-published, so that can contribute to even more errors. Always best to double check data if it is something that really matters in your situation.
I definitely considered it for my first job coming out of adult reconstruction fellowship. My wife and I focused our search heavily on states without income tax and those with mountains. It’s the way we prefer to live, so they were heavy influencers.
With mountains and without income tax. Tough find. What did that leave you, Alaska, Washington, and Nevada?
Tennessee fits those criteria, though the mountains are smaller than the ones out west. The Hall tax (tax on dividends) will be phased out and repealed in a few years.
Those criteria are high in importance for me as well. Here in eastern Washington, we have no income tax, no sales tax on food, and lots of beautiful mountains. I live within 90 minutes of five ski resorts, one of them being very nice (Schweitzer in north Idaho). Property taxes are a bit steep for my taste (about 1.1% of real value), but we live in a modestly priced home. Local sales tax is 8.7%, also a bit high but not really a problem when you’re savings rate is 50%. It would be difficult for me to move to an income-taxed state. Tennessee would be a plausible choice for us if we had to move.
Are you in Spokane by chance? I am moving there in a few months.
This is definitely one way to look at things and choose a location, however I agree that there are many other factors to include that will directly affect your cost of living. Without doing any fancy math- I think real estate tax, sales tax and local tax can really add up . Just a simple sales tax can easily eclipse state income taxes with a few big purchases.
Just a note regarding Tennessee. In 2016 the governor signed a bill that would phase out the taxes on dividends and investments over a 6 year period. Will be fully repealed January 1, 2021. That being said still have a fairly high sales tax rate.
Nice to see that oddball tax go away.
Tennessee is getting rid of their dividend state tax too. It will soon have no income tax but a high sales tax. Still my taxes here in Cali sure do hurt.
For Maryland at least it looks like you did not include the separate county income tax that is added onto the state rate…. this varies by county but 1% more is a safe estimate. Not including it is a common mistake because it’s relatively exoteric.
Sadly I can only wish it was 1%. In some more population dense counties it’s up to 3.2%. In the end Marylanders pay about 8% effective tax rate, making it one of the highest taxed states.
You are right. I miss-typed. It is more like 3% more.
The city of St. Louis adds on a 1% flat tax for anyone that lives within its borders or works within its borders. There are other cities that do similar things.
Oooh…that’s a dirty little trick. Glad I’m not there. Federal and State income taxes are plenty.
Yes, the county tax is quite panful. But to add insult to injury, I experienced the ultimate “dirty trick”.
I purchased a new home in a “lower” tax county that sat just near the boarder of a “high” tax county. Upon filing my state taxes the first year, expecting a small refund, I received the payment along with notice that the refund had been reduced. The explanation was that I had not paid the full county tax. After working back through the calculation and full list of county tax rates, I realized I was being assessed for the neighboring county tax.
I called the state tax line and explained where I lived and what I assumed had happened. I was met with skepticism, but told that I would need to compose a letter and send it along with a number of documents to prove that I lived in the county in which I “claimed” to live. In the end I did receive the proper refund, but it made me detest this tax even more!!
I stayed in Ohio for two years after I did my fellowship and on top of state income tax I had to pay 2 additional income taxes in the form of a city tax in Cleveland for where I worked and a city tax where I lived (which only gave partial credit for tax I paid in Cleveland). So it added up to be quite a bit as well.
I luckily found a property and subsequently found a amazing job in Tennessee and love that there is no state income tax. Granted sales tax is higher than pretty much the entire country (9.75%) I still come out way ahead (I would have to purchase $100k of goods each year just to be even with a lot of the state income taxes in other places) and I come nowhere close to that amount.
It is true that currently Tennessee has tax on dividends/interest (Hall tax) which is currently being phased out (for 2018 it is 3%) and set to decrease by 1% annually till eliminated in 2021). So by time I have my war chest in place with income streams in place it should be a non factor.
I just realized that the 100k goods purchased a year I used above was to make it equivalent for a 250k salary. Just extrapolating for the salary I earn I would most likely have to buy 350k/yr of goods to make it my sales tax a break even with majority of the other state income taxes.
Property tax here is fairly reasonable in Tennessee compared to some of the rates I’ve heard in Texas or California as well.
Geographic arbitrage definitely can turbo charge your desire to reach FIRE
I am glad you brought up the issue of local income taxes in the state of Ohio which can be substantial. When I lived in the Cleveland area, I was paying 2.5% in Elyria, my work city, and another 1.5% in Lakewood, the city of residence. In addition, if you work in a number of jurisdictions within Ohio, you have to pay city income tax in each of those cities which as a freelancer during that period, I had to file in as many as 10 municipalities. Add in the onerous marriage tax in the state of Ohio. It was one of the factors that led me to accept a position in Illinois.
Wow! It’s got to be really bad to drive a doc to Illinois!
Ohio currently allows for the first $250,000 in income to be deducted as long as the income comes from a pass through entity, like an S-corp. Last year I paid very little to Ohio in income tax, while my associate(an employee, not an independent contractor) paid over $7,000 to Ohio despite making a lot less than me. Bonkers.
You can also mitigate this somewhat by retiring in a no income tax state. Unlike federal tax, state tax can be avoided by contributing to tax deferred investments and then moving prior to withdrawing.
The problem is most of us would rather NOT relocate after retirement- we have friends and family in the place we spent our career. But huge arbitrage there for sure.
Physicians at times make no sense. You are one group that should .not complain about high taxes, because your income and in many cases your patients life depend on them. Let me state this as clearly as I can. Income taxes at local and federal levels are a net plus for our profession. Health related expenditures are heavily subsidized by counties, state and federal government.
Without this revenuestream, say good by to significant chunk of your income. Did not the recent financial crisis tech you guys anything. Every damn profession took a hit. People lost jobs, houses, families. But thnaks to largess of government, we did very will. Heck, many of us even prospered, bought more stocks, investment properties, etc
No other profession, that makesas much income as we do, benefits from our bureaucracy as much as we, the doc.
Thin about it
Good luck if you’re hoping to find any group happy to pay taxes.
yes, but fact is physicians benefit enormously from tax system.
Everybody benefits enormously from the tax system-defense, roads, police, fire, SS, Medicare etc.
Are you denying the fact that significant percentage of physician income is DIRECTLY related to taxes.
Nearly everything is directly related to taxes. Government spending is a massive part of our economy. Why would I deny that my physician income is as well? I think I’m around 40-45% Medicare/Medicaid/Tricare.
It depends on the physician’s practice setting. For example, 100% of a VA physician’s salary typically comes from the federal budget, and thus taxes. A physician whose patient panel is comprise of 30% Medicare and 10% Medicaid will have a portion of his/her wages tied to reimbursement from federal and state coffers. However, a physician who owns a boutique cash only primary care or surgical specialty practice will not have any income DIRECTLY tied to taxes.
None of mine comes from taxes. I do some DPC, a lot of elective procedures (cosmetic stuff) and ZERO insurance. Cost of living is dirt cheap in Louisiana, unless you buy a really big house and a lot of toys. Food and medication are not taxed.
Everyone who pays taxes sends a large chunk to Medicare, Medicaid and Veterans health care. States chip in also, no doubt.
It’s in ones best interest to minimize taxes to the degree it can be legally accomplished.
Because of the highly progressive nature of federal taxes and all sorts of other types of progressive taxes and fees in our culture, if you want to keep your hard earned money, you are going to look al ALL ways of reducing taxes. Almost all tax breaks cut out at the AGI of most physicians.
In 2017, my total tax bill (federal, state, local, SS, Medicare and ACA tax) , NOT counting property taxes, gas taxes, sales taxes, use taxes, and other taxes I don’t even know I pay, will be something like $130,000.
As my single largest expense, I want to minimize them. In fact, they are so onerous I am looking forward to early retirement and will be quite happy to see them drop by $100,000. My AGI will be much lower. Then I will be afforded something that I haven’t had since I was still in training: a tax break…any tax break…other than a 401K and similar tax deferred savings. I’ll be “just a dude with a family” instead of “a rich doctor”.
This is one of the reasons why I live in IL instead of moving back to CA, where I’m originally from. The last few years have allowed me to save enough money to pay off my student loans as well as invest. Eventually, I’ll move back to CA to be closer to my family but that state is so damn expensive, esp the Bay Area.
Income taxes are of course only one piece of the tax puzzle. Usually the biggest chunk for high income professionals. There are a few resources to estimate total tax burden by state (including property and sales). Here’s one… https://wallethub.com/edu/states-with-highest-lowest-tax-burden/20494/
The problem with those sorts of things are they assume your income is more middle-class than physician-like. The income tax matters far more than anything else for most physicians (although I’ve seen some pretty high property taxes in some states.) For example, in my state I’ll pay close to 6 figures in state income tax but my property tax is only $3600 and I bet we don’t pay $5K in sales tax unless we buy a car or boat that year.
Very good point.
Plus, property and sales taxes can be much more easily managed by spending less and being more frugal and not living in huge mansions or expensive homes.
Looks like income taxes are THE taxes to look at when doing geo-tax-arbitrage planning.
Michigan has a reasonable state tax (4.25%) but it’s one of the most expensive states as regards auto insurance.
With four vehicles total and several children, this makes a difference as do property taxes.
It seems to be a good idea to check state, local, sales, property and even use taxes and progressivity of taxes as well as cost of living and auto insurance rates.
We would likely still be moving to the mountains anyway with climate and lower cost of living playing the biggest role in the decision.
If taxes will be a consideration, you must look at all the taxes in the state. For example, Oregon has the highest income tax but has no sales taxes. When you take into consideration all the taxes a state will collect from you, the picture looks different.
As I’ve discussed before, in my books and blogs, don’t let money make the decision, it shouldn’t get that much power. Decide where you live based on wanting to spend the rest of your life in that location. You will be happier if you love where you live.
Dr. Cory S. Fawcett
Prescription for Financial Success
As a doc, I’d prefer to pay sales tax rather than income tax.
So live in Washington for the no income tax and shop in oregon for no sales tax? Live on the border and it’s a win-win.
Ah, but you are supposed to pay Washington sales tax when shopping in Oregon, right?
One is also supposed to send in sales taxes to one’s own state for online purchases that do not assess sales taxes.
One more consideration. Texas allows cities/schools/community college tax districts to increase their property taxes by 8% each year, so they all do. Taxes on a nice house can run $12K a year, but don’t blink, as it will go up 19K due to compounding in a short 7 years. Governor wants to limit to only 4%, with more if local election held. Also proposing a freeze on retiree property taxes. Some neighbors have to sell their home while retired as they cannot afford the taxes anymore.
Still better to live and practice in a rural area if the cost of living is lower.
The disclusion of “all state taxes” (property, sales, etc) make this article very skewed and somewhat intellectually dishonest. Try owning a $800K home (good luck going lower and having a decent school) with 3+% property taxes…
No income tax does not mean low tax. Your “win” will be determined by how much you make and what property you choose to live in.
Yes, you definitely need to consider your entire tax burden. But for most docs during their peak earnings years, the income tax is typically much higher than property taxes. 3%+ property taxes are pretty brutal. Mine are under 1% of the home’s value and my income taxes are 20X my property taxes.
I’ve been a single, high earning physician in SoCal for the past 5 years–so I’m pretty sure there is nobody else on this site who is paying a higher percentage of taxes than me 🙂 I agree with all the other comments that it’s one factor to consider, but definitely not the most important factor when looking for a job. I know for a fact that my salary in CA is inflated compared to the east coast. Could I make more and pay less taxes if I lived in the middle of nowhere in the midwest?
Absolutely, but you couldn’t pay me enough to do that.
The best advice that I can give for a young physician is to live close to family (assuming you like your family Lol). You can’t put a price on having the support of family around.
Work in Washington state 0% state income tax. Portland Oregon is a very short drive where sales tax is 0%. Win win.
You have to also consider the reimbursement in some states. California and New York have very poor wages for physicians compared to other states. Add in the higher cost of living and taxes, one can find it very difficult to save lots of money.
The key to these no or low tax states is to also be frugal. Don’t buy a McMansion to keep property tax low and don’t buy a new car every 3 years.
Regardless of what type of tax, income vs. property, vs. sales, keep one damn thing in mind, without government subsidizing the health care system, physicians will make less money.
By all means, use all tax avoidance strategies available to high earners, but remember we can use these strategies only because government sponsored health care programs.
Lets not kill the golden hen as far as we are concerned, AKA, taxing the corporations and public.
What in the heck are you talking about?
Subsidized healthcare?
Tax avoidance? – you mean following law like mortgage deduction or super funding 529? It’s all legal bro
Killing golden goose? There will always be sick people and exchanging a service for money will always exist.
Simmer down yo
JustSayin
I think AbehamD is saying that physicians like any other citizen can use strategies to lower taxes, but should not forget that without tax dollars, doctor salary would take a big cut. He/She is correct.
Also, tax avoidance is not illegal. I do my best to pay as little taxes as possible. Yet hoping that others keep paying taxes, so I can make a good living caring for my patients.
The curious case of my state–Arkansas.
Top income tax rate 6.9% (kicks in at 35k)
I pay 9.75% sales tax.–they even tax groceries.
High income tax, high sales tax. Worst of both worlds. I live in a nice house and pay about 5k/year in property taxes.
I seriously consider moving regularly–especially to Florida (no income tax, avg property/sales). I don’t move only because I don’t think I could make was much money elsewhere at this point in time.
Can you explain further how you calculated this:
“For example all things being equal (which is a huge assumption I know), if you were to take the $17,227 tax burden in CA and not have to pay it while living in Nevada and invested that amount yearly at a 5% annual gain, here are the results: In 10 years that would amount to $255,574.29, in 20 years to $643,816.91, 30 years to $1,276,223.23. Pretty significant I’d say.”
That looks like a future value calculation to me.
https://www.whitecoatinvestor.com/designing-your-portfolio-part-2-return-vs-savings/
Something is wrong. I live in MD, not 5.5, 9% and there’s county taxes, and then city tax etc…not sure about other states, but would check those #s.
Tennessee is looking like a better place to move to all the time. With Hall going away, no income tax, relatively low property tax, and I can control my spending to moderate sales tax, and it being a tolerable state(to me) to live in, maybe retiring there is a good option.
I just moved to Wyoming. No income tax and about 4 to 5 percent sales tax. Rural health pays well too…