State vs Federal income tax

[GorgeousSteak]

I'm trying to understand if (or in what ways) state income tax is calculated significantly different from federal income tax.  I realize this might be somewhat state specific, but is it generally the same?  Specifically the two states i'm currently interested in for possible ER are Colorado and Idaho.  A google search for colorado income tax says "Colorado's state income tax rate is a flat 4.63 percent of your federal taxable income".  Does this effectively mean if I pay 0 dollars in federal tax, I will pay 0 colorado tax?  If this is not true, what cases would cause me to not have federal tax but to have CO tax?  Same essential question goes for Idaho, google says the tax ramps up to 7.8%, but makes no mention of being related to federal rates.  So, is the situation in ID significantly different?  Like most people trying to retire early, I will probably have some combination of IRA conversions, capital gains, and dividends, so i'm mostly interested in if/how these categories would be treated differently at the state level.

[MDM]

I'm trying to understand if (or in what ways) state income tax is calculated significantly different from federal income tax.  I realize this might be somewhat state specific, but is it generally the same?

State income tax calculations are, so to speak, all over the map.  See http://www.taxadmin.org/fta/rate/ind_inc.pdf.

"Colorado's state income tax rate is a flat 4.63 percent of your federal taxable income".  Does this effectively mean if I pay 0 dollars in federal tax, I will pay 0 colorado tax?  If this is not true, what cases would cause me to not have federal tax but to have CO tax?

Depends on why your federal tax is $0.  If it is because your taxable income is $0, then yes.  If it is due to federal credits reducing your tax due to $0, then maybe not.

Same essential question goes for Idaho, google says the tax ramps up to 7.8%, but makes no mention of being related to federal rates.  So, is the situation in ID significantly different?  Like most people trying to retire early, I will probably have some combination of IRA conversions, capital gains, and dividends, so i'm mostly interested in if/how these categories would be treated differently at the state level.

Only way to know for sure is to fill out a state tax return as if you lived there.

[forummm]

I think it varies. You should look at the tax form for the states you are considering. That will be the best source of info.

I can say that it is definitely *not* the case in all states that $0 of federal tax means $0 of state tax. One reasons is federal tax credits that don't apply to the state. Another is deduction and exemption levels. For example GA. Their standard deduction is something like $3000 or $5000 for MFJ but the federal one is something like $12500. And the personal exemptions are less too. So you can make $20k or so as MFJ and pay no federal tax but owe hundreds of dollars of state tax.

[Cheddar Stacker]

In my state taxable income is calculated very differently than federal. My state also doesn't have any qualified investment tax rates. If I stay here when I FIRE (likely) I will pay more state tax than federal tax.

Every state is different. This is not a simple analysis.

[Bob W]

Wouldn't choose a place to live based on income tax.   It varies state by state but so do property taxes, sales tax etc..  Also many low tax states basically suck.

Our state, Missouri, is a very low tax state and doesn't suck.  So lucky me.  (I'm excluding CA of course as it appears to have crazy high taxes in relation to it's suck quotient and everyone is moving away from and not too there)

[GorgeousSteak]

Thanks for the replies everyone.  I guess I was hoping it was somewhat consistent, sounds like thats not true.  I'm not necessarily picking our place based on this info, but if there are significantly different results (like more than a couple thousand dollars), it might start to play a small role in the decision.  I'd say its more important to me for calculating our FI number.  And I'd rather not be surprised by anything like this that could be avoided.  I guess I'll try and look at the specific state tax forms to try and get a better idea.

[forummm]

If a state has low income taxes, they are making up that money in sales, property, or some other tax. As a retiree, you'll be spending more on the non-income taxes vs income taxes in comparison to during your working years. You might be looking at the less-important variable.

[Cheddar Stacker]

If a state has low income taxes, they are making up that money in sales, property, or some other tax. As a retiree, you'll be spending more on the non-income taxes vs income taxes in comparison to during your working years. You might be looking at the less-important variable.

Move to Alaska. They actually pay their residents a stipend from the oil reserves:

https://en.wikipedia.org/wiki/Alaska_Permanent_Fund

[GorgeousSteak]

forummm, yeah, figuring out how important each of those factors is kind of what i'm doing.

Sales tax seems easiest to figure out.  Its already somewhat built in to any FIRE calculations as it just contributes to spending.  The state differences don't seem as significant to me(except the few states that have no sales tax which I'm not interested in atm).  In most cases, money spent (and especially money that had sales tax applied to it) will be less than income taxed.

Property tax is pretty easy to look up and I can't see it having more than a couple thousand dollars/yr difference (especially between ID and CO for the price range we're looking at) so I'm not too concerned with it.

State income tax appears to be the most complicated to me.  At a minimum I'm probably looking at 50K of income from conversions, dividends, and gains.  And looking at what other people end up doing like the curry crackers (http://www.gocurrycracker.com/go-curry-cracker-2014-taxes/), they ended up with almost 100K.  That 100K ended up being 0 tax for federal, but if I lived in CO, is it going to be 4630, or maybe its still 0?  Or if I'm in ID, maybe its 7800ish, or maybe its 0 here too?  I think a difference this big is important to understand better.

[Cheddar Stacker]

The state differences don't seem as significant to me(except the few states that have no sales tax which I'm not interested in atm). 

WY. Not that far from CO. http://revenue.wyo.gov/ Might be worth a look.

[foobar]

Wouldn't choose a place to live based on income tax.   It varies state by state but so do property taxes, sales tax etc..  Also many low tax states basically suck.

Our state, Missouri, is a very low tax state and doesn't suck.  So lucky me.  (I'm excluding CA of course as it appears to have crazy high taxes in relation to it's suck quotient and everyone is moving away from and not too there)

From some online state income tax calculators.

Misouri tax on 20k of income: 975
CA tax on 20k of income:  355

Thats over 2x more in taxes.

Missouri tax on 40k of income: 2175
CA tax on 40k of income:  1375

Still over 50% more in taxes

Are you sure that CA is the high tax state?:) CA has a very progressive tax code. Missouri has  a regresive one (it maxes out at 9k. And who was the idiot that thought 11 tax brackets between 0 and 9k was a good idea?).  As far as COL and the like, remember CA is a lot more than just LA, SD and the bay area.   Property taxes are  very reasonable (google prop 13). Sales taxes do suck but they at least exclude things like food and medicine.

As always put your assumptions in and evalute your situation not the general one.

[johnny847]

forummm, yeah, figuring out how important each of those factors is kind of what i'm doing.

Sales tax seems easiest to figure out.  Its already somewhat built in to any FIRE calculations as it just contributes to spending.  The state differences don't seem as significant to me(except the few states that have no sales tax which I'm not interested in atm).  In most cases, money spent (and especially money that had sales tax applied to it) will be less than income taxed.

Property tax is pretty easy to look up and I can't see it having more than a couple thousand dollars/yr difference (especially between ID and CO for the price range we're looking at) so I'm not too concerned with it.

State income tax appears to be the most complicated to me.  At a minimum I'm probably looking at 50K of income from conversions, dividends, and gains.  And looking at what other people end up doing like the curry crackers (http://www.gocurrycracker.com/go-curry-cracker-2014-taxes/), they ended up with almost 100K.  That 100K ended up being 0 tax for federal, but if I lived in CO, is it going to be 4630, or maybe its still 0?  Or if I'm in ID, maybe its 7800ish, or maybe its 0 here too?  I think a difference this big is important to understand better.

In general, states start with you federal AGI, apply their own tax deductions and credits, and tax you on some schedule (some states have a progressive scale, while others have a flat rate tax). Furthermore, in general, they do not tax investment income favorably - it is just thrown into the bucket of "income."

There are of course exceptions. Unfortunately, the only way to figure this out is to find some website that summarizes the tax code for each state, or step through the state's tax returns yourself.


But building on what forumm said, on average, for similar amounts of public services provided, you're going to be paying the same amount through sales taxes, property taxes, and income taxes. Of course some states may tax you less in the sum of all three categories, but that simply means you will be receiving less in public services.