If Doctors Chose Their Job Locations Based on State Income Taxes

JUNE 16, 2017
Passive Income MD
This is an interesting time of year as graduates of residency and fellowship programs start their “dream” jobs.
 
I remember my residency classmates (what seems like so long ago) interviewing all over the country and something that always seemed to come up (besides salary and call duties) was whether the state had no state income tax. I particularly remember that coming up in conversations about Texas and Nevada.
 
Training in California, we were reminded often by attendings that state income taxes for a good number of physicians were close to 10%. I planned to stay in Southern California so it wasn’t a particular concern or differentiator for me. However, for some, it seemed to be a legitimate factor in choosing their jobs.
 
I was reminded of it again as my current fellows dug deep into the job hunt. I heard the same phrase uttered again, “Well, you know Texas has no state income tax.” This time I couldn’t get it out my head and I had to take a look at what state income tax rates are currently at around the country.
 
This simple case study revolves around a married couple making $250,000, filing jointly, and taking the standard deductions (thus the effective tax rate). I used Smart Asset for the quick calculations and here’s what I found:
 
State State Income Tax Effective Tax Rate Tax Burden
Alabama 5.00% 3.87% $9,674
Alaska 0.00% 0.00% $0
Arizona 4.24% 3.50% $8,757
Arkansas 6.90% 6.19% $15,485
California 9.30% 6.89% $17,227
Colorado 4.63% 4.63% $11,575
Connecticut 6.00% 5.22% $13,062
Delaware 6.60% 6.01% $15,026
District of Columbia 8.50% 7.43% $18,586
Florida 0.00% 0.00% $0
Georgia 6.00% 5.82% $14,551
Hawaii 8.25% 7.42% $18,540
Idaho 7.40% 6.57% $16,433
Illinois 3.75% 3.68% $9,211
Indiana 3.30% 3.27% $8,183
Iowa 8.98% 4.61% $11,527
Kansas 4.60% 4.14% $10,356
Kentucky 6.00% 5.80% $14,509
Louisiana 6.00% 3.52% $8,790
Maine 7.15% 6.26% $15,659
Maryland 5.50% 4.69% $11,715
Massachusetts 5.10% 4.92% $12,292
Michigan 4.25% 4.11% $10,278
Minnesota 7.85% 6.46% $16,144
Mississippi 5.00% 4.78% $11,959
Missouri 6.00% 5.26% $13,142
Montana 6.90% 6.32% $15,789
Nebraska 6.84% 5.80% $14,496
Nevada 0.00% 0.00% $0
New Hampshire 0.00% 0.00% $0
New Jersey 6.37% 4.67% $11,672
New Mexico 4.90% 4.32% $10,804
New York 6.65% 5.82% $14,539
North Carolina 5.75% 5.40% $13,495
North Dakota 2.27% 1.70% $4,239
Ohio 5.00% 3.94% $9,844
Oklahoma 5.25% 4.78% $11,943
Oregon 9.00% 8.40% $21,006
Pennsylvania 3.07% 3.07% $7,675
Rhode Island 5.99% 4.45% $11,135
South Carolina 7.00% 6.21% $15,530
South Dakota 0.00% 0.00% $0
Tennessee 0.00% 0.00% $0
Texas 0.00% 0.00% $0
Utah 5.00% 4.88% $12,194
Vermont 7.80% 5.70% $14,244
Virginia 5.75% 5.46% $13,651
Washington 0.00% 0.00% $0
West Virginia 6.50% 5.93% $14,837
Wisconsin 6.27% 6.09% $15,223
Wyoming 0.00% 0.00% $0
 
 
Key Points
· Seven states currently have no income tax: Alaska, Florida, South Dakota, Texas, Washington and Wyoming.

· Two others (New Hampshire and Tennessee) residents pay state income taxes exclusively on income earned from dividends and investments.

· Michigan and Massachusetts are the only states with a flat tax rate.

· The following states have tiers above $250,000, where rising incomes would trigger an even higher tax rate: AZ, CA, Conn, MD, Minn, NJ, NY, ND, VT, Wis, DC.

· At this income of $250,000, based on effective tax rate, Oregon residents actually have the largest tax burden. However, as incomes rise, higher tax rate hikes are triggered in California climbing to over 10% with a max tax rate of 13.3%.

My Takeaways
Obviously the more you make, the more you save in taxes by living in a state with no income tax. These savings can add up to quite a bit over time, especially if you factor in compounding gains.
 
However, we all know this is only part of the story. All states have a budget and they need to get funding from somewhere. So if it’s not from income taxes, they’re likely getting a good amount from various other types of taxes: sales, business, real estate, gas, etc.
 
Obviously this shouldn’t be the main determinant for anyone choosing a job, but it’s nice to be informed especially when everyone is talking about it.

For more by Passive Income M.D., check out his posts here.

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