Tax Burden for Renters Varies Widely Depending on Location
A middle-income family of four, who rents rather than owns a home, pays more money to the government
in the form of taxes if they live in the greater Louisville, Kentucky area, than anywhere else in the U.S.
“If you’re a renter, and you take into account your total tax liability including federal, state, and local income taxes, FICA (social security), sales tax, and ad valorem taxes, you have less disposable income if you live and work in the Louisville area than elsewhere,” says Art Balicki, director, client operations at Runzheimer International.
According to a recent Runzheimer analysis, a family of four with an annual income of $60,000 living in the suburbs with the working spouse commuting into Louisville to work, pays an average of $15,311 in annual taxes, or 25.5% of annual income, after taking personal exemptions and allowable deductions (see table below).
Other high tax areas include greater Washington, DC, where this suburban family pays $15,193, or 25.3% of income; Philadelphia, with a tax burden of $14,717, or 24.5%; and Honolulu at $14,543, or 24.2%.
For the renter, Anchorage, Alaska is the best place to live from a tax standpoint. In the 49th state, you pay only $10,145 in taxes, or 16.9% of income. In Manchester, New Hampshire you pay only $10,316, or 17.2%; Miami, $11,021, or 18.4%; and Casper, Wyoming, $11,171, or 18.6%.
So why is Louisville so high? “A high state income tax and steep local wage taxes of more than $1,300 per year (many metro areas are zero), combined with a sales tax of 6% plus an ad valorem tax on vehicles, all add up to the highest tax liability in the land,” says Balicki. In the Runzheimer analysis, the standard federal tax deduction of $7,350 was used rather than itemized deductions for all locations because “in all cases the tax liability was less using the standard deduction.”
A quick analysis of other locations shows that the District of Columbia has a higher “state” income tax than any of the 50 states; residents of the nation’s capital pay $4,512 per year. In the Philadelphia area, wage earners pay the highest local wage tax, 4.3% for non-Philadelphia residents who commute into the city. Hawaii boasts a state income tax of 10% for those whose taxable income is more than $41,000 per year.
At the other end of the scale, Anchorage has no state, local, or sales taxes. “That’s zero, as in pay nothing,” emphasizes Balicki, “one of several reasons why folks are attracted to this northern climate.” New Hampshire is the only other state with no state, local, or sales tax (except for passive income), according to the Runzheimer analysis.
Balicki draws attention to the differences in tax liability according to whether you own a home or rent. “For example, for the homeowner, Milwaukee is the third highest most heavily taxed area for the 50-state analysis, but if you rent Milwaukee ranks 27th. There may also be higher or lower taxes for different localities within each state.”
In the table above, total tax liability has been determined for the renter. Areas researched are suburban communities surrounding each metropolitan area where families earning $60,000 annual income reside. An annual rental of $14,640, or $1,220 per month, is used in all locations.
Federal Tax: Federal tax is based upon the most current tax formulas. Taxes are calculated twice using both itemized and standard deductions. For itemized deductions, a passive income and miscellaneous deduction amount are used. Passive income is from savings interest, dividends, capital gains, etc. The amount is $1,816. Miscellaneous is for charitable contributions and financing expenses. The amount is $1,273. Other deductions are for state, local, and ad valorem taxes. In the table above, a standard deduction of $7,350 is used since the tax liability is less for the renter at this income bracket.
State Tax: Taxes are calculated twice using both itemized and standard deductions. The liability most favorable to the taxpayer is used. For itemized deductions, some states allow for a renter credit and this credit is based on the same amount at all locations.
Local Wage Tax: Local wage taxes are calculated based upon the work site and community of residence. The work site is considered to be the major city in each location. This local wage tax is either the local city or county liability.
FICA: FICA, or social security tax, is included in all totals. The amount is $4,590.
Ad Valorem Tax: Many states impose an ad valorem tax for the registration of family vehicles. It is often called a wheel tax, property tax, or vehicle tax. It is based upon the same value vehicles in all locations. Vehicles used are a late-model full-sized car, and a 4-year-old model.
Sales Tax: Based upon the same volume of identical goods & services purchased annually by a family of four earning $60,000. The cost of these goods & services will vary by location. Both state and local sales taxes are calculated.