Considering Move to Nashville-Tax Question (sales, mortgage, house)

[ehe1248]

I'm interviewing for a job in Nashville. I currently reside near San Francisco. One of the many advantages of moving to Tennessee beyond lower housing costs (Keep in mind a single family home in my neighborhood is now over a $1M ) is that my effective income tax drops from almost 10% to zero. My question is now that I loose the ability to deduct state income tax, should I increase my potential mortgage to help offset the loss of the tax state deduction I have today?

Here is an example:
-If I make $200K in California and assume I will make the same in Tennessee, right now I pay about $18,000 in state income tax. I can deduct that from my federal tax saving me about $5K. I'm I right in assuming that if I paid an additional $1500 in interest (i.e. increasing my mortgage payment from $2K to $3500) I will achieve the same result?

Any thoughts from any CPA/Accountant types?

[Sunflower_gal]

Great question - I'm not a CPA, but I am an accountant. You can deduct sales tax on your federal return in lieu of no state income tax.


If I were in your situation, I would look at 4 items first:
1. 401k contributions - are you maxing out your 401k annually?
2. HSA - Are you eligible for a health savings account and are you maxing out your annual contribution?
3. Roth IRA contributions - depending on your AGI, I would look at maxing out my Roth IRA, if you are under the income limitations. Sometimes with pre-tax payroll deductions - health spending account (HSA), medical, 401k, etc., a $200k salary can be under the $194k Roth IRA income limits for married filing jointly. If you are a single filer, then Roth IRA contributions are out of the question at that income level.
4. Charitable contributions - would you consider giving more money in charitable contributions as a tax deduction?


It's hard for me to encourage someone to take on more debt as a tax shelter strategy without knowing your entire financial situation. However, as a general rule of thumb, people can typically afford a house that costs 3 times their annual income, as long as they are not leveraged to the hilt. IMHO, $600k will buy you a very nice house in most areas of Nashville.

[WanderingFar]

You're overthinking this.

Assuming you're married, your federal tax rate is 28% and your CA rate is 9.3% on $200k. Obviously you're not getting taxed twice on the 9.3%. So you pay $18,600 to CA and almost $51k to the Feds (that's not exactly how it's calculated but I'm simplifying to make a point.)

Then you move to TN. The Feds tax the full $200k. You're not on the border so it doesn't change that 28%. You now owe $56k (again, over-simplified math) but you still SAVED $13.6k that you'd otherwise be paying to CA.

So yes, you've lost the deduction, but you're not in the hole for that money; you still come out ahead. Way ahead.

[septimus]

Why would you pay the bank $1 to save $0.30 in taxes?

[N.Cal]

If I make $200K in California and assume I will make the same in Tennessee,

Do you know the salary for sure? Because this is a very bad assumption to make since salaries in Tennessee are much lower than they are in Northern California. I was lucky to keep my San Francisco salary when my job relocated me here, but everyone they've hired here is much lower, since that was the point of moving.

[GWoodle]

Originally Posted by N.Cal

Do you know the salary for sure? Because this is a very bad assumption to make since salaries in Tennessee are much lower than they are in Northern California. I was lucky to keep my San Francisco salary when my job relocated me here, but everyone they've hired here is much lower, since that was the point of moving.

Depends on the rules for your company. It may be possible your current employer moves to TN and keeps salary & most benefits the same. You may need to adjust for health care changes. Not sure if sales tax at nearly 10% would be a little higher here. If you have a lot of income from investments, (Dividends, Interest, Mutual fund capital gains), the 2016 5% Hall tax still kicks in until 2022 when it is eliminated. Then we will be a true no income tax state.

May be best to add to tax deferred 401K & other savings. Maybe you can do a deal with mortgage to get lower interest rate?

[brentwoodgirl]

Originally Posted by septimus

Why would you pay the bank $1 to save $0.30 in taxes?

Exactly. Plus you can take a sales tax deduction on your taxes if you don't have an income tax. It's not huge, but it gives some offset.

[WanderingFar]

Originally Posted by septimus

Why would you pay the bank $1 to save $0.30 in taxes?

YES! This too. As mentioned above, maxing out retirement vehicles is the best strategy because you're paying yourself 100% of that money, not paying for the privilege of borrowing money. That's $18,000 right here.

[CountryGirl2b=]

I am also going to guess that gas taxes would be lower, too? I just checked GasBuddy and the Bay Area Costco is charging $2.45 a gallon and here it's about $1.95. Property taxes MIGHT be cheaper. I seem to recall there was some referendum where in CA the taxes can't be raised until the property is sold or something?

Not tax related but I pay SO much less here in TN for electricity . . not sure if the difference will be as much coming from CA but I probably save a good $1,000 a year on my power bill.

Looks like your sales tax is pretty close to ours . . .

[N.Cal]

Originally Posted by CountryGirl2b=

Not tax related but I pay SO much less here in TN for electricity . . not sure if the difference will be as much coming from CA but I probably save a good $1,000 a year on my power bill.

.

Way more expensive if you lived right in SF where (1) you don't even have an air conditioner and (2) only run the heater a few times per YEAR. I pay more here since pretty much run a/c or heat all year round.