These 5 States Tax Dividends the Most

Recent increases on high earners could take a toll, especially if you’re among the retirees counting on dividends for income.

Mar 30, 2014 at 9:07AM
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Do you derive income from dividends? Where you live says a lot about what you'll owe.

Do you know everything you need to know about where you live? This question matters more than you might think, especially if you're retired and derive a portion of your income from common stock dividends.

According to a recent report from the Tax Foundation, adding in the impact of state taxes can bring your total tax burden on personal dividend income to between 25% and 33%. The U.S. average stands at 28.6%, a combined rate that takes into account the deductibility of state taxes against your federal taxes, local income taxes, the phase-out of itemized deductions, and any special treatment of personal dividend income.

The message? Expect to pay more than the 20% top federal rate for taxing dividends -- or 23.8% if you account for a new levy to help pay for Obamacare -- especially if you call any of these five states home:

1. California -- 33%
Just five years ago, the Golden State was struggling with how to bridge an $11 billion budget shortfall. A range of emergency spending cuts in the ensuing months has since been supplemented by tax increases. Proposition 30, in particular, raised the state sales tax rate to 7.5% and increased marginal income tax rates to as much as 13.3% for those earning $1 million or more -- the highest since World War II.

2. Hawaii -- 31.6%
Three years before California raised taxes on its richest citizens, in May 2009 Hawaii's legislature approved three new marginal tax rates for high earners. Those earning at least $150,000 (or $300,000 filing jointly) pay 9%, those earning at least $175,000 (or $350,000 filing jointly) pay 10%, and those earning above $200,000 (or $400,000 filing jointly) pay 11%. Hawaii also boosted its tax rate on hotel accommodations around the same time, from 7.25% to 9.25%.

3. New York -- 31.5%
While its personal income tax rate tops out at 8.82%, New York still collected the most state and local tax per person in 2012 -- $2,196, the Tax Foundation reports. Local taxes, in particular, have become a hot issue in the state. Recently elected New York City Mayor Bill de Blasio is fighting to increase taxes on those making more than $500,000 a year from about 3.9% to 4.4%.

4. Oregon -- 31%
Sales tax revenue isn't available to the Oregon state government. Thus, in an effort to raise funds in the wake of the Great Recession, in 2010 citizens approved higher levies on individuals earning at least $125,000 and households earning $250,000 or more. Today, the Tax Foundation says Oregon's richest pay 9.9% on personal income.

5. Minnesota -- 30.9%
Just behind Oregon with a 9.85% top tax rate on personal income, Minnesota recently passed reforms to provide tax relief to an estimated 270,000 citizens this year and 650,000 next. But those cuts are mostly aimed at the elderly and low-income workers. Last year, Gov. Mark Dayton led the charge for a $2.1 billion package of tax increases that are still in effect today.

Where you live matters. But when it comes to figuring your tax burden it's also just one consideration, and as an investor in dividend-paying stocks, you're already on track to retiring wealthy. So keep at it. Buy for the long term, and reinvest dividends until you need them. Chances are you'll have more than enough saved for when Uncle Sam comes calling.

Take advantage of this little-known government tax rule
But it also can't hurt to prepare for the worst. Recent tax increases have affected nearly every American taxpayer. With the right planning, you can take control of your taxes and potentially lower your bill. In our brand-new special report "The IRS Is Daring You to Make This Investment Now!," you'll learn about the simple strategy for cashing in on a little-known IRS rule. Don't miss out on advice that could help you cut taxes for decades to come. Click here to learn more.

Tim Beyers is a member of the Motley Fool Rule Breakers stock-picking team and the Motley Fool Supernova Odyssey I mission. Check out Tim's Web home and portfolio holdings, or connect with him on Google+Tumblr, or Twitter, where he goes by @milehighfoolTry any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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