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Personal Finance > Taxes
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Tax-friendly places
graphic January 28, 2002: 10:01 a.m. ET

State and local taxes can take a big bite out of your wallet. But that's not the case everywhere.
By Staff Writer Jeanne Sahadi
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  • Tricky tax changes - Jan. 24, 2002
  • Get a jump on estimating your taxes - Jan. 21, 2002
  • Your taxes: new breaks - Dec. 31, 2001
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  • Tax Foundation
  • TaxSites.com
  • CCH Incorporated
  • Money's Best Places to Live
  • CNN/Money Tax Center
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    NEW YORK (CNN/Money) - Ah, after-tax income. Seems you never can have enough. But you might get -- and keep -- more of it if you have a tax-friendly address.

    Now "tax-friendly" doesn't just mean low income taxes or none at all, although that can be quite a boon. There are plenty of other taxes that act as a third hand in your pockets, including property tax, sales tax and investment tax. If you own a company, you also have to consider business taxes.

    Since U.S. state and local taxation systems often differ, making an apples-to-apples comparison can be tough. But there are studies comparing residents' tax burdens across the United States. Keep in mind that any such study makes certain assumptions and pulls data from specific tax years, which can make a difference in how a place ranks.

    Nevertheless, there are states that come up again and again as being among the most or least tax-friendly.

    Like parkas?

    Few would dispute, for instance, Alaska's status as a tax-friendly state. It imposes no personal income tax or state sales tax, and a great deal of state revenue comes from oil-related businesses, which lightens residents' tax burden considerably.

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    In fact, the Tax Foundation, a nonprofit organization providing tax policy analysis, found that Alaskan residents pay the least in overall state and local taxes as a percentage of income -- an average of 6.3 percent compared with a national average of 10.2 percent. "Overall" taxes include all taxes levied by state and local governments, including some business taxes and tax-like fees.

    New Hampshire ranks second, with residents paying only 7.6 percent of income on average. It, too, has no income or state sales tax.

    Of course, not all sub-zero climes are good for the wallet. Maine ranked as the least tax-friendly state, since per capita residents pay an average of 13.6 percent of income in state and local taxes. New York ranks No. 2 in this category, with residents paying 12.9 percent of income in state and local taxes. (For a look at how your state ranks, click here.)

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    Now, it would be a mistake to assume you'll automatically pay through the nose if you live in Maine, New York or other states with hefty tax burdens, including Wisconsin, Vermont, Connecticut and Minnesota. Similarly, you won't necessarily need extra storage space for your dollars if you live in Alaska, New Hampshire or any of the other top 10 tax-friendly states such as Tennessee, Colorado and South Dakota.

    That's because tax-friendliness depends on several factors. Location, for one. Generally speaking, cities are less tax-friendly than rural areas. New York City may be one of the most expensive places tax-wise, but "Western New York may compare favorably to a lower tax state," said J. Scott Moody, a senior economist with the Tax Foundation.

    And not all cities in a state tax alike. Take two Alaskan cities: Juneau charges a 5 percent sales tax on goods and services, but Anchorage charges none. That's one reason why Anchorage ranks among the most tax-friendly cities in the country for a family of four earning up to $150,000 a year, according to a D.C. government study of tax burdens in states' largest cities. The others are Cheyenne, Wyo., Las Vegas and Sioux Falls, S.D. (To see how the biggest city in your state ranks, click here.)

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    Your income is another consideration. A state that doesn't tax wages and salaries may sound great, but if you're a retiree living off interest and dividends, then Tennessee, for instance, may not be the most tax-friendly place for you. While the state does not charge a traditional income tax, it does charge a flat 6 percent tax on interest and dividends, which is on the high end of most states' ordinary income tax rates. (Illinois, for example, only charges a flat 3 percent income tax.) What's more, Tennessee charges a 6 percent sales tax, which again ranks on the high end for most states.

    There are also states that offer tax breaks on retirement income. Michigan, for one, doesn't tax benefits from the Armed forces, public retirement plans and Social Security, according to CCH, a tax information publisher.

    Beware property tax

    For taxpayers of all ages, property tax is the other big elephant in the living room. The Tax Foundation found that New Hampshire, one of the most tax-friendly states overall, ranks as the second worst state for local property taxes. Per capita, New Hampshire residents pay $1,555 a year compared with a national average of $783. (Keep in mind, "per capita" means every man, woman and child, homeowner or not. So if you do own a home, you may very well pay far more than average.)

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    New Hampshire ranks just behind New Jersey, where local governments collect an average of $1,591 per capita in property taxes.

    That contrasts sharply with Alabama, where per capita residents pay only $210. It's joined by New Mexico, Kentucky, Arkansas and Louisiana on the low end of the property-tax scale. (For a look at how your state ranks, click here.) Again, where your house is located plays a big part in how much you have to pay. The more desirable the area, the higher your property taxes are likely to be.

    So, what's a taxpayer to do?

    If you do live in a high-tax area, there are a few things you can do to minimize your tax pain. The first is to reduce your federal tax liability since often state and local income taxes are assessed as a percentage of your federal adjusted gross income. "Your federal return usually is going to be the driving force," said certified financial planner Mari Adam.

    A second, more drastic choice, is to move to a lower tax area. This can be especially advantageous before you incur a big, one-time tax event, such as a Roth IRA conversion or the exercising of stock options, Adam said. Or, if you have a business where you live, you might just move the business to a lower tax area.

    Of course, your other option is to recognize that perhaps you're happy with your location and that there is a price to be paid for the privilege of living there, Adam said. In that case, be sure to make liberal use of the local library, pool and tennis courts, as well as the schools if they're high quality. Said Adam, "Use the services so at least you don't feel like you're getting ripped off." graphic

      RELATED STORIES

    Tricky tax changes - Jan. 24, 2002

    Get a jump on estimating your taxes - Jan. 21, 2002

    Your taxes: new breaks - Dec. 31, 2001

      RELATED LINKS

    Tax Foundation

    TaxSites.com

    CCH Incorporated

    Money's Best Places to Live

    CNN/Money Tax Center





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