You don’t get to just choose. It’s a function of how many days you spend in each state (and New York, in particular, has been trying to “crack down” on part-year residents that spend time in Florida, in particular).
I know people who fly through Newark instead of Kennedy just to avoid overstaying their time in NY (although I’ve not sure if that’s really required; but the consequences are significant).
It’s still a choice isn’t it? You have a house in New York and a house in Florida. You have to jump through some hoops to maintain Florida residency, but you still have that choice.
I was just expressing my confusion at why, if someone has properties in both locations, they wouldn’t make the obvious choice and establish residence in the lower-tax state.
For the same reasons that everyone doesn’t just up and move from NY to FL.
Plus, it’s not just “some hoops”. And it’s not just a matter of counting days.
But people can still do it if they meet some constraints, right? I’m sympathetic to the fact that the constraints might involve an unacceptable amount of time living in Florida. But that doesn’t mean 100% of one’s time, or mean that it’s no longer a choice at all, right?
I suggest that if you wish to move your residency and domicile (they aren’t the same thing) out of NY while continuing to own property in NY that you intend to live in, that you consult an attorney. Auditors are going to ask if you still have business involvement in the state. Which property is worth more. Where do you spend special occasions. Etc.
I don’t know who this famous person is, but if they’re still doing business in NY, there’s not much they can do here.
Your OP didn’t express it as a function of income tax. You asked about state taxes. In TX and a handful of other states, none of that is income tax. But the state is still taking that dollar; they just assess how much you owe it in different ways.
In my OP I explained that I was asking because of a person who claims she spent 50% of her income in taxes, implying that she pays 50% income tax, which we established here was a lie even if we include state income taxes.
Property taxes are a different beast. This is based on something that you chose to own, and if it’s too outrageously onerous, nobody’s stopping you from selling it and living in a smaller house. Anyone who doesn’t do that is obviously not as income-constrained as they pretend to be.
If someone complained that they spend 50% of their income on cars or collectible stamps or whatever, we’d rightly laugh at them. These are expenses you took on voluntarily, understanding the tax implications. Investment property is no different.
Capital gains rates are much lower than that, topping out at 20%, but I see that your point is that even a person making a gajillion dollars cannot pay more than 37% of their income in federal taxes.
Romney said that 47% of Americans do not pay income tax. Which was true.
But meaningless.
If you’re at the highest capital gain rate, you’re also subject to the 3.8% Net Investment income tax, which applies to all investment income. It’s possible to have capital gains that are not investment income (incurred as a result of ordinary business operations), but most of the time when we’re talking about individuals, they are.
Even worse is that this tax can apply to ordinary income, most likely interest but also rental property income. Thus you definitely can pay more than 37% marginal rate on this type of income.
Any self-employment income is also going to be taxed at a much higher total marginal rate, even if some of that tax is going towards future benefits. Once you have qualified for Medicare, any additional Medicare tax you pay is a pure tax that gets you no benefits. While that’s not true for Social Security in that every bit of SS tax you pay gets you at least some small sliver of benefit, for anyone even coming marginally close to the wage limit, it’s not going to be very much. There are definitely very large diminishing returns to the increase of your Social Security benefit as you approach the wage base. Thus you should consider a significant portion of self-employment tax to be an income tax, not just an insurance program.
At least self-employment income can’t be subject to Net Investment Income tax. But wait! There’s the Additional Medicare tax. This is a 0.9% tax on earnings (wages and self employment income) beyond $200k for single and $250k for joint filers. These two taxes were implemented by the ACA and are often lumped together, as they have many of the same characteristics in terms of who pays them, though they will never be levied on the same income.
That’s long term capital gains. Short term capital gains are taxed at ordinary income rate.
Correct.
My point is, trying to clarify my OP a bit, that there’s no income-based tax that would get a person up to a total tax liability of 50% and probably not even 37%.
Someone insisted that we have to talk about property tax as a part of this, but a high property tax burden isn’t a function of onerous income tax policy, it’s a function of hereditary wealth and/or suboptimal asset management.
You specified New York and Florida earlier in the thread, so I didn’t consider California, which has the highest marginal income tax rate of any state. The top marginal rate (for incomes over $1 million) is currently 13.3% when you include the 1% mental health services surtax on incomes over $1 million. The top current combined state-federal marginal rate is 13.3% + 37% = 50.3%. As income increases without bound, the total tax rate approaches the marginal tax rate. Even though the first $1 million or so is taxed at a lower rate, there must be some level of income, albeit a very high one, where the combined effective tax paid reaches 50% of income. We can solve for that unknown income if we make the simplifying assumption that the taxpayer takes the standard deduction on her state ($4,537) and federal ($12,200) taxes. This assumption makes more sense than if might seem because federal taxes are not deductible for state tax purposes in California, and the state tax deduction is limited to $10,000 for federal tax purposes. As in my previous post, I ignore payroll taxes.
On the first $1,004,537 of income, she will pay $107,763 in California income taxes and $224,982 in federal income taxes, or $332,745 in total. After that income threshold is reached, every additional dollar is taxed at 50.3 percent in combined state-federal income tax. I calculate the total effective tax rate will reach 50 percent when income reaches $57,512,333. For incomes higher than that, the tax rate will be over 50 percent, but will never rise above 50.3 percent.
Now, in real life a person with that much income will be able to hire clever tax advisors who can help her reduce her tax bills. But in theory paying over 50 percent of income in income taxes is possible.
Thanks for that thoughtful workup. So you could reach 50% income, in California, if you earned over 57 million a year. In income.
I hope I won’t be accused of moving the goalposts by observing that $57mm is 5 times more wealth than most of us would require to live quite comfortably off interest for the rest of our lives. And we’re talking about one year of income. Couldn’t resist editorializing, but I’ll leave it there.
Just out of curiosity (but hopefully too far off-topic), what happens if you have to file in multiple high-tax states? Are state income taxes paid in one state off-set in the other state?
I remember when I worked at a law firm, one of the critical pieces of information we had to account for was where we were when we performed the work. My understanding was that your average law firm (and wouldn’t this mean your average partner in the partnership?) had to file non-resident tax returns in numerous different states if enough work was performed there. I’ve never known what that means for the overall tax liability.
It depends- some states have agreements with some other states that you only pay taxes to your home state, so that if you live in PA and work in NJ , you only pay taxes to NJ - and vice versa if you live in NJ and work in PA. In other cases, there is no agreement ( like between NJ and NY) and if you work in NY and live in NJ, NJ will give you a credit for taxes paid to NY. Basically , you will not be double-taxed. Prior to COVID, most of the complaints were from people who lived in a state without income tax, but worked in a state with income tax- they have to pay non-resident income taxes to the state where they worked, but wouldn’t have paid any income tax if they had earned all their income in their state of residence.
I just want to chime in there to say that the wording used by the famous stupid person in the OP most definitely does not imply that they pay 50% in income taxes, merely that 50% of that person’s income is spent on taxes. The very real suggestion to include expensive property taxes makes a lot of sense and suggesting that it’s somehow against the spirit of the OP’s declaration (or the OP’s declaration of someone else’s assertion) seems unreasonable.
Perhaps it does not imply that, but if it doesn’t imply that, then it’s just meaningless theatrics.
If I said I spent 50% of my income on expensive wine or antique cars, what does that tell you about the things I buy? Are they outrageously expensive, or do I have a very tiny income for my tastes, or is there some unknown third factor? Or a little bit of both?
That’s what adding property tax is. If you have a ridiculously onerous property tax burden, that’s 100% a choice you made. You knew what it was when you bought it. Rent it and recoup the money, or sell it and invest it elsewhere. Make better investment decisions, or don’t complain.
It’s just “I Pay Big Taxes” posturing.
Received a good GQ answer by @bibliophage in post #34. Requesting closure to prevent anyone besides me from editorializing.