The REAL Cost of Living in NoVA/Greater DC (real estate, mortgage)

[Carlingtonian]

A lot of people who think about moving to NoVA and the greater DC area rationalize the massively increased housing costs by considering the signficantly higher salaries that many employers here offer, compared to what salaries are in many other places around the country.

I just did our federal taxes, and a few things made me realize why even a very healthy income here doesn't make up for the higher housing costs, due to several things about the federal tax system:

1. If you plan to use a conventional loan to buy a house, you'll need to make a down payment of 20%. In most of NoVA, that will mean at least $100K (on a home costing $500,000--which is at the low end for a detached house in a good school district here). Got that kind of cash lying around?

2. If you do an FHA loan, you can lower that to 3%. However, you will have to pay PMI of over $200/month. If your household income (for married filing jointly) is under $109K, you can deduct this. But because of that higher salary (intended to offset the cost of housing), you will very possibly be making over $109K as a household. So the higher income you get in the DC area actually hinders you in this instance.

3. A similar thing happens with medical expenses. You can't deduct medical expenses unless they are over 7.5% of your AGI. Again, higher AGI here means you have a higher threshold to meet in order to take the deduction.

4. The same thing happens with student-loan interest. If you're married filing jointly, the cap is $120K/year.

So before you take that job in this area, think long and hard about the costs of living here. It might well be worth it for you, but you will almost surely be devoting a much higher portion of your income to your housing, even with a much higher salary than in many other US cities.

On a related note: Imagine if Congress were to get rid of the deduction for mortgage interest. For us, this deduction alone saved us about $8400 in federal tax owed. (Alas, we still owe Uncle Sam somehow.)

[ChristineVA]

These are very good points. I often think that when filing taxes, there should be a cost of living factor for certain cities.

Due to my "high" income (to make up for high housing), I have never been able to get the college tuition credits offered to my dependents. These are pretty decent credits. It's always bugged me that someone living well in, say, Indiana or North Carolina, gets to take full advantage of these due to not having a hyperinflated salary.

I think that living in any high COL area has it downsides when it comes to tax credits, deductions, etc.

[Carlingtonian]

Thanks. Yeah, it's amazing that these caps aren't adjust for COL. It's almost like we have a different currency on the two coasts.

But I doubt Congress will ever do that, since they occasionally raise the prospect of eliminating these types of deductions altogether! (Yet they want to keep tax breaks for oil companies and continue to allow moving jobs overseas as a deductible "business expense." Could lobbying have something to do with that?)

If my wife and I could find jobs doing what we do in a lower-cost area, we probably would. The thing is, if what you do for a living doesn't really exist outside the federal government, then it's very hard to find job openings that are not in the DC area. (They may exist but are far fewer.)

[snuffy1968]

Have to agree....have to save save save to get that 20%, or a very nice salary or generous relatives. We did not have the 20% and paid PMI; however, when refi, the house value had increased to the point that no longer paid PMI. But agree housing is tough and especially tough for first time buyers. With that said, a lot of people did well before the bubble.

[ACWhite]

Well said, C. And here are a few more:

1) the income levels at which fed income tax rates increase are the same regardless of whether you live here or in Waco. So you will pay much more in Fed income tax on the higher salary here, even though a much lower salary there would buy you a nicer house, more groceries and child care, etc.

2) Tax deferred plans like IRAs and tax favored retirement like Roth IRAs have income caps that you will quickly hit here. So you will have to save more money and lose out on the favorable treatment of the gains over time, just to have enough at retirement to cover the COL. Same for 401ks though the caps are higher.

The Congress ought to adjust tax laws to take into account real and substantial differences in COL. But I don't see that happening soon, so I agree with your advice that job hunters definitely need to weigh these factors.

[CaliTerp07]

Originally Posted by Carlingtonian

If my wife and I could find jobs doing what we do in a lower-cost area, we probably would. The thing is, if what you do for a living doesn't really exist outside the federal government, then it's very hard to find job openings that are not in the DC area. (They may exist but are far fewer.)

My husband and I are spending our evenings lately searching for jobs in other areas. It's so scary though, looking at cities where there are only a dozen major employers. There are a lot of negatives to this area, but the stability of employment is hard to find anywhere else

[snuffy1968]

If Congress did get rid of the mortgage deduction, that would be tough. I think if they did, it would have to be for income like over $400,000...And a lot of those taxpayers have paid their house(s) off. Or maybe something like a flat tax and lower the rates with minimal deductions.

[Carlingtonian]

AC, thanks; those are great points.

CaliTerp, I feel your pain! At least you have a more transferable skill than many of us feds (consulting/teaching math, as I recall). Good luck with the search.

Snuffy, I too like the simplicity in the idea of a flat tax--but obviously the catch is that it would have to raise enough dough to keep the government operating. And I doubt the country could ever agree on what a fair flat-tax rate is--for individuals and for corporations. Also, if a flat tax were ever advanced as a real possibility, the CPAs and accounting firms would go to the mattresses in their lobbying efforts, since a flat tax would basically put them out of business.

[cy_flembeck]

Originally Posted by ChristineVA

These are very good points. I often think that when filing taxes, there should be a cost of living factor for certain cities.

Due to my "high" income (to make up for high housing), I have never been able to get the college tuition credits offered to my dependents. These are pretty decent credits. It's always bugged me that someone living well in, say, Indiana or North Carolina, gets to take full advantage of these due to not having a hyperinflated salary.

I think that living in any high COL area has it downsides when it comes to tax credits, deductions, etc.

So you think Congress should change the tax code so wealthy people in the DC area can get a better deal on their Federal Tax Liability?

Let me address your last statement specifically. If you are paying more for a mortgage, real estate taxes and state income taxes because you have a higher income and a more expensive house, you will have proportional increases in deductions on your Itemized Deductions form (schedule A). That will offset your Federal Tax Liability more than the person who makes less money and lives in an area where a house costs less. In fact because you are at a higher starting tax bracket/rate, the deductions for you are more advantageous.

[ChristineVA]

Originally Posted by cy_flembeck

So you think Congress should change the tax code so wealthy people in the DC area can get a better deal on their Federal Tax Liability?

Let me address your last statement specifically. If you are paying more for a mortgage, real estate taxes and state income taxes because you have a higher income and a more expensive house, you will have proportional increases in deductions on your Itemized Deductions form (schedule A). That will offset your Federal Tax Liability more than the person who makes less money and lives in an area where a house costs less. In fact because you are at a higher starting tax bracket/rate, the deductions for you are more advantageous.

That's just it. Not everyone in the DC area is "wealthy." Sure, I might make $180,000 on paper, but the various things in this area eat into that: higher real estate, expensive commuting costs, and all the little things that are a little bit more expensive here.

I will use my FIL as an example. He was a GS-13 here at the weather service. He lived in a townhouse and was very middle class. He moved to a town just outside Asheville, NC as a GS-13 meteoroligst. He was able to buy a nice 4 bedroom home on about 3 acres of land and, according to him, "lived like a king" in NC. Even losing his DC locality pay--he came out better. His income was then lowered and he was able to realize some deductions that he had been phased out for living here due to a higher income.

I realize this is one piece of anectdotal evidence but I do think it happens.

That said, I'm not crying foul too much. I think the stability of this area and the great many options for advancement and moving around make it worth what I believe I'm losing in the tax game.