Why are so many highly paid entrepreneurs, corporate executives and financial professionals from the Northeast moving to Florida? It’s not just the warm weather, beaches, boating and golf — it’s the tax climate.
As savvy investors know, cutting your annual tax payments can improve your financial position, freeing up more money for spending or investing. After all, there’s a lot of truth to the saying, “It’s not how much you earn — it’s how much you keep.”
Longtime South Florida residents, as well as newcomers, have an opportunity to grow their savings and investment accounts more quickly than their counterparts in high-tax states like New York, Connecticut, California, Illinois, New Jersey and Massachusetts.
Let’s say you are fortunate enough to have $650,000 in adjusted gross income for 2019. According to data provided by the Tax, Trusts & Estates Department of Cole Schotz, while your federal income tax (typically 37 percent) would be the same regardless of location, a New York City resident would pay an additional $69,719 in state and city income taxes.
By moving to Florida, that hypothetical high-income earner could eliminate those state and city taxes, and keep that $69,719 for other purposes. In addition, the 2017 federal Tax Cuts and Jobs Act placed a $10,000 cap on a married taxpayer’s deductions for state, city and local property taxes — effectively raising their federal income taxes.
In many South Florida communities, property taxes in general are lower than in the Northeast, and residents can also reduce the taxable valuation on their primary homes by taking advantage of the state’s homestead exemption provisions.
If you are still in the workforce, consider maximizing your contributions to a qualified retirement account, such as a 401(k), IRA or SEP-IRA. Every dollar you contribute can be subtracted from your gross income, reducing your tax bill for the current year. That’s a major benefit, regardless of your income level.
If you will make $100,000 in 2019 and contribute $10,000 to a 401(k) at work, for instance, your taxable income would only be $90,000. That could save you several thousand dollars on your next tax bill, giving you extra money to set aside for the future. By putting that money into a qualified retirement account, those dollars potentially could grow over the years.
While you would eventually need to pay taxes on those contributions, that may be many years in the future when your current income — and tax liability — is likely to be lower in retirement.
Taxes In Retirement
For Florida retirees, a different set of tax issues may come into play. Since taxable income is likely to be lower, retirees may look for strategies to maximize their current income from investments or minimize the consequences of withdrawals from the tax-deferred retirement accounts.
An experienced financial advisor can offer guidance in terms of structuring a diversified investment portfolio based on your goals, risk tolerance, potential tax liabilities and other issues. You should always consult your tax and legal advisors to understand any associated benefits or implications related to your particular situation.
For example, it might be beneficial to include high-quality municipal bonds in your portfolio. These bonds, issued by states, counties, cities and public agencies typically pay lower interest than corporate bonds issued by private entities. However, that interest is generally exempt from federal income taxes, resulting in potential tax savings for some investors. Some income may be subject to state and local taxes and to the federal alternative minimum tax. Capital gains, if any, are subject to tax.
On the other hand, investors should consider the capital gains tax consequences of selling assets that have risen significantly in value since their purchase. That’s especially true for U.S. stocks, which have enjoyed a bull market for most of the decade. Before selling stocks, you should talk with your financial or tax advisor about the impact on your next tax return. In some cases, it might be desirable to sell a different stock that has seen lower growth in order to cut the capital gains tax or look into other options in the alternative investment world that can defer the capital gains tax.
For wealthy investors, estate taxes may also be a concern for the future. An estate planning attorney or other specialist may be able to help you with strategies to minimize or eliminate potential taxes.
Regardless of your age or income, it’s important to consider the tax consequences when making decisions that could affect your finances. Don’t hesitate to ask for professional advice and try to stay focused on the bottom line.
Source: Miami Herald