Should You Move to Save on Taxes?

After I filed my taxes and completed my 2018 tax report, I thought it would be interesting to run my taxes through several different scenarios to see how much I could save if I lived in a different city or state.

Many lawyers make decisions about where to live based on the cost of living (although those of us in Biglaw are mainly confined to big cities). I doubt that taxes play too much into many people’s calculation but it’s likely your greatest expense, so it’s worth examining. I’m sure everyone agrees that there’s a big tax difference between living in NYC or Houston.

Putting aside the politics of high-tax states vs. low-tax states and obvious cultural differences, from a strict numbers point of view, just how much lower would my taxes be if I lived in a different state or city?

If you’ve ever considered moving to a different market or are a rising 2L trying to decide which city to focus your career search on, this article is for you.

Related: Jamie Dimon’s Shareholder Letter Offers Insight to Growth

As a reminder, this is how much I paid in taxes in 2018:

  • Federal: 20.70%
  • Payroll: 4.71%
  • Obamacare: 0.36%
  • State: 5.54%
  • City: 3.10%
  • Total: 34.42%

NYC to Long Island / Upstate New York

Let’s consider the most straightforward move at first. What if I moved outside of NYC but stayed in the state of New York? I’d be able to escape the New York City tax.

If you make over $65,000 in NYC, you pay a 3.876% tax on income over $50,000 (single) or $90,000 (married). In the last couple of years, this has become a five-figure expense in our household but it’s always been thousands of dollars. As a first-year associate, I paid $5,378 to the City of New York.

If I were to move outside of NYC but stayed in the state of New York, I’d eliminate the New York City tax but still be subject to the same state tax rates.

Turbotax makes it easy to run your taxes through alternative scenarios. After I finished and filed my taxes, I saved a new version of my tax file and then entered a non-NYC address and made a few selections to let Turbo Tax know that I was no longer an NYC resident for purposes of this hypothetical.

The results?

First, my federal taxes increased by about $5,000. That makes sense as I could no longer deduct the New York City tax on Schedule A. The increase in federal taxes was immediately canceled out by a decrease in the AMT tax, for a net change of $0 from my actual 2017 federal taxes. This makes sense because AMT disregards state and local taxes anyway and I’m always going to have to pay the higher of the two, which in this case is still AMT. Many people think state and local tax deductions are valuable because you deduct them on Schedule A. But if you’re paying AMT, it doesn’t matter.

Second, my state taxes stayed the same. If you still live in New York (or work for a NY company), you’re still subject to New York state taxes.

Third, my New York City taxes dropped all the way to $0 (duh!). Not paying NYC tax resulted in over five figures of savings, money that would flow directly into our pocket.

Finally, my sales tax would drop from 8.875% (NYC) to 8.625% (I used Mineola, NY in this hypothetical).
The total tax burden looks like this:

  • Federal: 20.70%
  • Payroll: 4.71%
  • Obamacare: 0.36%
  • State: 5.54%
  • City: 0%
  • Total: 31.32%

Conclusion: Essentially, New York State would pay me over $1,000+ a month to move out of New York City and into the suburbs. How’s that for an incentive to relocate?! I’m paying $1,000+ a month on top of my Brooklyn rent for the privilege of living in NYC

NYC to New Jersey

Let’s make the hypothetical slightly more complicated. What if I moved to a different state right across the Hudson River? I would no longer be subject to New York City taxes, but now I’d also have to navigate New Jersey and New York State taxes.

Following the same steps as I did above, I saved a new version of my tax return and switched my residency to New Jersey.

Not surprisingly, federal and payroll taxes stay the same. There’s nothing that changes there, so it’s on to my state return.

New York State still taxes you on income generated in New York, so New York State taxes are mostly the same. It’s not quite identical because this blog earned a tiny bit of money and that money would be considered money earned in New Jersey, and therefore a small amount of my income would not be subject to New York State taxes. It’s such a minimal amount at this point that it doesn’t move the needle on taxes, although it could be material down the line.