Well, today is Income Tax Day 2024. We came home from snowbirding three weeks ago and rushed to get our paperwork to the accountant so that they could get the forms properly filled out by 4/15 this year. We successfully filed them on Saturday.
We didn’t pay much in taxes for 2023 as we usually do, since we mostly lived off cash we had in the savings. We had some income – our pension, our rental townhouse, and board work – but not as much income as when we have investments to sell.
Next year will be a different story since we bought our Florida condo and will need to replenish our cash buffer. Our accountant also warned us that this year’s Presidential and Congressional elections could bring some changes to the tax code as well.
Since we talk about tax differences between the states in the comments of this blog quite a bit, I thought Tax Day was a good time to look up and share the latest (2022) comparison of state tax burdens …
15 STATES WITH HIGHEST TAX BURDEN …
15 STATES WITH LOWEST TAX BURDEN …
MIDDLE 30 STATES …
Tax Foundation, 2024 State-By-State Comparison
No surprise, California leads the way with per capita taxes that are almost 3x the taxes of their Florida rival. I was surprised to see California even higher than the unique state of Hawaii. North Dakota is an odd state to be in the “Highest Taxes” group. Their state coffers are bolstered by the oil boom they’ve been experiencing the last 5-10 years.
The two states we now own property in are also quite different – Minnesota is in the “Highest Taxes” and Florida is in the “Lowest Taxes”. At some point we’ll pursue flipping our residency, but I’m guessing that’s a few years off.
I’ll let you determine if you are getting a good return on the money your state is spending. Your opinion might be a function of your political loyalties. Still, in most cases, you’ll likely answer, “NO” – since Gallup Polls show about two-thirds of people say federal, state, and local taxes are too high.
Did you get your taxes filed on time? Any insights as you filled out this years 1040 form?
Image: AccountingToday.com
MrFireStation 
I filed a few weeks ago and what surprised me was how low my actual tax rate is. Not that I am happy with the amount of tax I pay, but the rate was lower than what we think of when we read the headlines.
I have not posted comments in a long time as after I signed up to receive emails of the blog I was challenged with commenting due to my lack of logging into WordPress.
Now if I can only get the idiots from passing more bond debentures as they “only” add 0.5% to your property taxes. How landlords deal with rent control in the era of higher cost of everything is beyond me
LikeLiked by 1 person
Thanks for the comments! Yes, my actual tax rate was much lower than I expected, too. When we retired, I put too high a rate into our retirement model. It was partly a buffer, but also a bit of a mistake. As a result, our portfolio has grown much better than expected. A nice problem to have.
Agree – the life of a landlord is challenging. I went on a road trip with a friend who owns a bunch of rental properties last week. He’s really frustrated with the current combination of high inflation, high taxation, and high interest rates. He can’t raise rents fast enough to keep up with it all.
LikeLike
I start filling out my taxes at the start of the New Year to get a handle on how much I will have to pony up in April. In March, I get amended 1099s from my brokerage that include corrections for classification of REIT income and some Muni Bond Fund classification by source state and return of capital. I wait until April to hit the happy button to electronically upload my Federal and Federal Returns, plus send in a physical check for any amount I owe.
Here are some of my percentages of AGI. Federal Tax = 9.9%, Self-Employment Tax = 7.4%, CA Tax = 4.3%, Gasoline Taxes = .3%, Overall government theft = 26.5%.
Some of the areas that helped in 2023. I harvested $3,200 in energy tax credits upgrading my Electric Heat Pump and some skylights which were ripe for replacement. We drove down our AGI by maxing out Solo 401-ks for my wife and myself.
The area that really hurts was Self-Employment Tax which applies even on funds that you send to the Solo 401-k, so it takes a real bite. Note that Social Security and Medicare take a double bite out of earned income, because it gets deducted from your paycheck and then you turn around and pay Federal and State Taxes on an amount that was already taken from your paycheck. This will be my last year for consulting and I expect to wind it down by the end of the year.
Here is my tip for retirees. I plan my next year’s earnings to keep my Modified Adjusted Gross Income, which is Adjusted Gross Income plus your Muni Bond Interest, just under the threshold that kicks in IRMAA (Income Related Monthly Adjustment Amount) which is really a higher premium for Medicare. An extra dollar above the threshold can trigger a couple thousand in additional Medicare Premiums.
Here are a couple tips for living in the People’s Republic of California. Stay in your house long term to keep your Proposition 13 tax basis. You can take advantage of moving your home one time after age 55 to a home of lesser cost and move your Proposition 13 tax basis to the new home. Under Proposition 13, your property taxes can only be increased 2% per year, which I can budget for. Many who move to income tax free states such as Texas, tell me they are giving back their State Income tax savings in the form of Real Estate Taxes. I am not a big fan of high property taxes that are uncapped, because they can literally tax you out of your home you sort of already own. You don’t really ever own your home, because you have to pay the government every year for the right to continue living in your home. If you think it works any different, then you need to visit your county’s next property tax auction.
Max out your Social Security Payouts, because in the People’s Republic Social Security payments are state tax free. Social Security payments are also 15% tax free for Federal Taxes as well. CA Muni Bonds are also State Tax Free. If you plan, you don’t have to move somewhere with worse weather to avoid being taxed to death. Starting in 2015, my wife and I are looking forward to no more Self-Employment Taxes and starting to draw Social Security with the result in our overall taxes going down by a lot.
Understand your taxes and what causes them to go up or down. Plan your next year ahead of time to adjust your quarterly estimated payments and give yourself time for setting up and funding Solo 401-ks, adjusting investment types and doing energy efficiency upgrades to take advantage of the tax credits.
LikeLiked by 1 person
Great comments, Klaus – a couple thoughts …
– I’m not nearly organized enough to start thinking about taxes in January! 🙂
– Our federal tax came in at ~15%; That’s income, cap gains, and self-employment
– Minnesota tax was 4.5%; plus Sales Tax (6.75%)
– I don’t think I’ve ever earned an energy tax credit in my life
– Double taxation – I really wish there was a court case to challenge these schemes
– I’m thinking this is my last year of paid board work, too. We’ll see.
– I’m not old enough to be thinking about Medicare yet, but that’s a good watch out
– I wish we had Prop 13 in MN, but our property taxes are uncapped
– According to Tax Foundation, CA total taxes/capita are 2.7x what they are in TX
– Social Security is a ways off for us (9 years), but SSI is taxed in MN
Very good advice, as usual!
LikeLiked by 1 person
You mentioned that you were looking at replacing the electric heat pump on your new place in Florida. Since you are planning replacement anyway, you need to select equipment that is a SEER rating of 16 or higher. 20 SEER is around the max. Heat pumps are an exception for the energy upgrade credit that allow for this credit with second homes. Last year was the first year that the energy tax credits did not have income phaseouts that disqualified us, so I backed up the truck to harvest $3,200.
Maxing out two Solo 401-ks also cut our overall federal and state tax percentage by a lot. You can contribute the individual contribution maximum and then match if with another 20% employer contribution which is really your contribution since you are self-employed based upon gross profit after expense items and 1/2 of Self-Employment Taxes.
LikeLiked by 1 person
We haven’t started to assess the best approach for a new HVAC system for the condo. The current system is working and a friend of ours that owns a HVAC company is telling us to not replace until necessary. The quality / lifespan of newer units is a bit questionable compared with older ones. Will definitely look at a heat pump vs central AC then.
I checked on using a solo 401k last year instead of the SEP IRA that we have been using. I forget why our current structure worked best. I think it was so that we could bring our son in as an employee.
LikeLiked by 1 person
I did not realize that you didn’t already have a Heat Pump in the FL condo. Forced Air Gas is typically the cheapest heating. If you have resistive electric heating then switching it over to an Electric Heat Pump will save electricity. Florida has by Minnesota standards not very cold winters. I remember going there for Christmas vacation over college and found the locals wearing their Lambeau goose down stadium coats when it was 50 degrees F outside, absolutely hilarious.
The reason heat pumps save electricity in climates that don’t get below freezing is that they transfer heat energy from the outside that is 3 – 4 times what you input to the equipment. It is really good for LA especially when you live in a rural area that has propane.
You can handle your son by paying him as an independent contractor and issuing him a 1099-NEC. He can arrange his own health insurance and write it off if he needs health insurance. He can also setup his own Solo 401-k. I highly recommend Vanguard because they have an excellent small business team that will fill out all the plan adoption papers and all you have to do is sign and return them. It literally took me less than an hour to setup. I also contacted Fidelity and Wells Fargo. As of two years ago, Fidelity would send you out plan adoption paperwork in the form of a PDF where you have to correctly fill in a bunch of information that would have taken me a lot of time to figure out. Wells Fargo told me that I needed to get the adoption paperwork from an independent compliance firm that often charges an annual fee.
Here are the advantages of a Solo 401-k over a SEP-IRA. It is all about being able to squirrel away the maximum amount of money. When a business is a sole proprietorship, the employee/owner both pays themselves wages and may also make a SEP contribution, which is limited to 25% of wages, namely, profits minus SEP contribution.
For a Solo 401-k you can contribute a maximum of 20% of profits minus one half of the SEP contribution, plus up to $31,500 annual maximum for both you and your wife who are over age 50. You handle this by designating your biz as a joint venture and complete separate Schedule C’s for you and your wife to account for the SEP and Solo 401-k contributions.
LikeLiked by 1 person
I think we have a natural gas furnace / central air / forced air system in Florida. I haven’t spent much time thinking about it yet. I think we’ll dig into it next winter when we are down there for an extended period of time. The condenser is on the roof of the 5 story building. I’m guessing the HOS has some input on what gets installed.
I haven’t tried to set my son up as an employee, since he hasn’t really signed up for any employee-work right now. I have a few ideas of “work” that he could do, but haven’t organized anything for him. I guess we need to re-read my “Rich Dad, Poor Dad” book to remind us of the opportunities!
LikeLike
It was a painful year for our household from a tax standpoint. We had our second highest ever tax burden due to the sale of several rental properties. This was a planned sale of multiple properties at once to realize the significant growth since we purchased these particular properties in 2012, 2013, and 2016. I had hoped to 1031 them into new properties, but timing did not allow that to occur, plus I believe we will end up developing our next property investments. So we took the profits and the tax hit! I just got my bank notification yesterday that the Federal money was removed from our account. Our state hit will occur in few more weeks. As they say, “We had to make money to (need to) pay taxes.” (…But it still hurts my feelings!)
—We are doing our part to keep the cogs of government wasting our hard earned money!
LikeLike