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Realities of New Tax Bill Dawning on Californians and Other High Tax Residents

Thu, Aug 2, 2018 - 10:43am

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shakedownDid you know that if you live in a high tax state, it may be nearly impossible to leave? In our recent Lifetime Income podcast, Jim Puplava and Chris Preitauer discussed the impact of the new tax bill, the new tax brackets, and elimination of itemized deductions. Here's what they had to say...

Tax Brackets Changing

While most have expected to receive a tax cut under the recent tax bill, the reality is more complicated, Puplava noted, and as with most things, the devil is in the details.

Tax reform was sold on the premise that everything would be simplified, with only three brackets and easier filing. But that isn’t what happened. We now have seven tax brackets and all of the bracket deductions sunset in 2025.

“As your income increases, you may experience a higher tax rate at a lower level of income. … On the surface, it looks like your taxes may be going down until you compare where those brackets kick in at what level. They're going up if you make more money and live in high-tax states like California, New York, New Jersey, and Oregon.”

Deductions Eliminated

There’s a catch 22 in these new tax brackets as well. Though tax rates were lowered — at least, until 2025 — the reality is that these reduced rates were the result of eliminating itemized deductions.

Individuals can no longer deduct state income taxes, and for those living in high-tax states, this might hit particularly hard. Also, the new tax plan puts a limit on property tax deductions to $10,000.

See relatedDramatic Tax Changes Coming Your Way - Here's What You Need to Know

Again, this might not hit most of those living in already low-tax areas particularly hard, but for those living in coastal areas or who have houses worth much more than the national average, it could translate to a steep increase in taxes.

“Because of the elimination, what this means to you personally is more of your income is going to be subject to federal taxes,” Puplava said. “For many upper-income professionals, households where both spouses have good paying jobs, or for those living in high-tax states or high cost-of-living states, their taxes are more likely to be going up.”

High Tax State Exodus

Many in California and other high tax states are moving to cheaper parts of the U.S., but this is likely to become more difficult in the future.

Almost a third of Financial Sense’s California clients are looking at moving out of California as they approach retirement, he added. For those seeking to leave, they will benefit from lower taxes, but also lower costs-of-living in other states.

However, for some, especially those who pay larger amounts of taxes on average, there are stories of states seeking to prevent an exodus or otherwise harass taxpayers to claw back any loses in revenue.

“What the high tax states are doing now is setting up divisions of lawyers and accountants to go after upper-income taxpayers and businesses who leave the state,” he said. “They're harassing them with constant audits … tying them up in courts and running up their accounting and legal bills, making it almost impossible to leave the state. … It is still possible to leave, but it's going to take dramatic measures and legal and accounting expenses to do so.”

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