Where you live matters financially.
There's a reason so many people are moving from California to Texas. But... is moving to a 0% tax state that much better?
Keep reading to find out the real tax numbers behind moving from California to Texas:
Texas and Florida were the two fastest-growing states in the United States in 2023. On the flip side, California and New York led in terms of population decline.
What connects them?
What do Texas and Florida have in common? There lack of state income tax.
What do California and New York have in common? They have two of the highest state income tax rates in the country.
While there could be a lot of reasons for moving out of a state and to another, taxes are often cited anecdotally as one of the main reasons. This led people to speculate that Americans are migrating away from states with high income tax rates to states that have no income tax at all.
Regardless of the validity of that claim, today I’m going to walk you through how much of an impact your state tax rate actually has on you.
Let’s use the new classic: California to Texas since so many have made this move. Is it really that much better? Well, let’s find out.
To analyze this, we are going to assume a couple is bringing in $400,000 per year in wages. And we are also going to assume that they also just incurred $100,000 in long term capital gains.
This couple would incur $38,500 of tax in the state of California. The marginal tax rate for this couple would be 9.3% with an effective rate of 7.9% (not a flat rate in CA).
Now, let’s combine that with Federal taxes, this couple would incur around $95,000 in taxes federally. While they’re still in the 24% marginal bracket, their effective rate is around 20.2%. When you combine their state and federal effective tax rates, they are paying nearly 28% of their income in income taxes alone.
The good news is that they are clearing $400,000 per year in salary. Even after payroll taxes they’re far from starving. With that said, it’s hard to argue they wouldn’t feel that extra $38,500 every year.
Additionally, California just increased its' top marginal bracket to 14.4% for 2024. This makes it the most expensive state for millionaires in the country. So, eventually this couple may have that to consider, as well.
The top marginal capital gains rate in California is 13.3%. So on every $100k of capital gains, you pay an additional $13,300 in taxes. This is why so many business owners try to leave California before selling their business. On a $10mil sale, that's an additional $1.33 million lost to taxes.
This side is a bit easier to describe. Texas, being one of the nine states that does not have state income tax, offers my favorite rate, 0%.
Our couple saves $38,500 per year in income taxes. You may be asking yourself, a huge state like Texas, slated to spend $321 billion over 2024 and 2025, how can it fund its programs? They make up for the lack of income taxes with property taxes and sales taxes.
Texas ranks top 5 in highest property tax rates in the country. It also ranks 14th in highest sales tax rates. However, if our example couple would actually see some relief on the sales tax front, as California is number 7.
California's effective overall property tax rate is just 0.75%. The Texas rate is neatly a full percentage point higher—1.74%. On a $1.5mil home, that is the difference of $14,850 in property taxes.
In light of everything I’ve just said, it’s not a slam dunk to pack up and move to Texas to save on taxes if you’re a California resident.
In my experience:
For high income folks, you can end up saving quite a bit in Texas, especially upon a business sale.
But, for the average millionaires in California that is paying the highest state and local taxes in the USA, it's not a no brainer. You can afford to make the choice based on what you want. That's the power of having money in the first place.
I rarely advise moving just for taxes. The state you live in is a huge life decision based on what's important to you, what you like to do, where your family and friends live, etc. But you still want to look at the numbers.
Financial Advisor