With the calendar flipping into April, we're officially in crunch time when it comes to preparing and filing your federal (and perhaps state) tax return.
Short of filing an extension, most taxpayers have about two more weeks to divulge their most intimate financial secrets to Uncle Sam in the hope of exacting a refund. The good news, based on historical data from the Internal Revenue Service, is that about 80% of tax filers are indeed due a federal tax refund. For many Americans, this tax refund can provide a jump-start to a retirement account, emergency fund, or the "I really want to buy that [insert item here] fund."
But if we were to examine tax data released by the U.S. Census Bureau or IRS, we'd discover that what residents pay on a cumulative basis in taxes in one state can drastically differ from what residents pay in another state, even if they have similar modified adjusted gross household incomes. This is because all 50 states impose state and local taxes on their residents, which can greatly affect how much they'll owe come Tax Day. Examples would include property tax on homes and land, state income tax, and sales and excise tax.
Yet figuring out which states are paying considerably more than others isn't cut-and-dried. For that we'll turn to WalletHub's latest report on states with the highest and lowest tax rates.
Residents in these eight states are getting creamed by state and local taxes
WalletHub focused on all of the aforementioned state and local taxes (property, income, sales and excise), but also included vehicle property taxes into its comparisons as well. It also assumed, for the purposes of its report, that the average American household had a median annual income of $53,889, owned a home valued at $175,700, and owned a car valued at $23,070.
What WalletHub found when comparing the state and local taxes of each state against these established medians was that the residents in the highest-taxed state paid about 156% more in annual state and local taxes than residents in the lowest-taxed state (which happens to be Alaska). You can use the map below, courtesy of WalletHub, to get a rough gauge on where your state fits in nationally.
In particular, residents in eight states are getting creamed by high state and local taxes.
- Illinois: $7,836 paid in annual state and local tax returns (35.8%)
- Nebraska: $7,466 (29.4%)
- Wisconsin: $7,316 (26.8%)
- Connecticut: $7,262 (25.9%)
- Rhode Island: $7,255 (25.8%)
- New York: $7,211 (25%)
- Michigan: $7,054 (22.3%)
- Ohio: $6,991 (21.2%)
Residents in these eight states are all paying an average of 21%, or more, higher than the national average of approximately $5,770 paid by the median U.S. household. You'll note the figure in parenthesis next to each state corresponds with how much higher its annual sales and local tax responsibility is relative to the national average.
Illinois, the state with the highest annual state and local tax burden per household, bears the second-highest real estate tax per household in the country, and ranked 30th out of 50 in terms of state income tax burden. Additionally, when WalletHub looked at cost-of-living in each state, Illinois ranked in the top 10 among the most expensive. For most of the aforementioned states, a high cost of living and relatively high property taxes doom their residents to substantial tax liabilities.
Three tips to reduce your tax liability
However, the good news is that there are a handful ways taxpayers across the U.S. can help lower their tax liability (though most of these tax solutions are recognized at the federal level). Here are three considerations.
First, use your home to your advantage. While residents of Illinois may be on the hook for a relatively high property tax, there are ways you can squeeze tax deductions and credits out of your home. Energy upgrades, such as solar panel installation, could qualify for up to a 30% tax write-off, with no upper limit on the amount that can be deducted. Refinancing your home to a lower interest rate, and paying points in the process, could also allow you to amortize those points over the life of the loan. There are plenty of ways you can use your house to lower your tax liability.
Secondly, consider making an investment in yourself by opening or contributing to an IRA. A Roth IRA doesn't provide an immediate tax benefit to accountholders, but it does allow their nest eggs to grow completely free of taxation. Over multiple decades this could result in huge tax savings. By a similar token, if taxpayers choose to contribute to a Traditional IRA, they may be able to write off the amount contributed at both the federal and state level. The laws that cover which states allow deductions vary greatly, so you'll need to check with your state to see if a Traditional IRA contribution would be deductible toward your state tax liability.
Finally, consider giving to others instead of Uncle Sam or your local state. Charitable contributions are a great way to support a cause you believe in, and they can provide a tax deduction commensurate with your highest ordinary income tax rate. For instance, the median U.S. household with $53,889 in income falls into the 25% federal ordinary tax bracket. This means for each $1 you donate, you'd receive a $0.25 deduction.
If moving from the state you currently call home to a more tax-friendly state isn't an option, consider one, or more, of these tax tips to help lower your tax liability in the coming years.