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Editor's note: Tax season is upon us. So this week in DailyWealth, we're sharing some of our best ideas on how to legally lower your tax bill. Today, we start with a classic essay from Stansberry Research Editor in Chief Brian Hunt. Below, Brian shares one of the simplest ways to significantly lower your tax bill each year. Read on to learn how you can...
Get a Raise AND Lower Your Tax Bill... With One Simple MoveBy
Monday, February 9, 2015
Want to get a big raise at work?
Want to greatly increase your ability to build wealth with little effort?
If the answer is "yes" to these questions, move to one of America's tax havens. Move to a state that doesn't charge its citizens with a state income tax. It's one of the easiest, simplest ways to increase your ability to build wealth.
I'll prove it to you with an example that will blow your mind...
Most U.S. states charge an income tax in the neighborhood of 5% to 8%. Some states charge their highest earners at rates of more than 10%. When you add local taxes like county and city taxes, the overall tax rate for successful people in some areas (like California and New York City) are even higher than 10%.
At first glance, 10% might not seem like a big wealth hit. But regularly having 10% of your income taken away by taxes causes tremendous damage to your ability to accumulate wealth over the long term.
It's like trying to fill up a bucket of water with a leak at the bottom.
To get an idea of the damage a 10% annual tax hit will cause over the long term, let's look at the 20-year career of a successful executive.
We'll keep this example simple to zero in on the core idea.
Let's say our successful executive earns $250,000 per year for 20 years. That's $5,000,000 in earnings over the time period.
Now, let's say our executive lives in a region that hits him with a 10% annual tax on those earnings.
At that rate, he will pay $25,000 per year... for a total tax bill of $500,000 over 20 years.
A half a million dollars is a lot of money. But the damage is actually much worse when you factor in the "missed opportunities" that taxes take away from you.
You see, that half a million dollars is money that could be directed into investment vehicles like blue-chip stocks or real estate. By not being able to invest it, you're hit with a big "opportunity cost."
If our executive lived in an area with no state or city tax, he could keep that $25,000 per year... and direct it into good investments.
If he kept just one of those extra $25,000 payments and put it into an investment that could compound tax-deferred at 8% annually for 20 years, he would have $116,523.
If he were able to plow each extra annual $25,000 payment into an investment that compounded tax-deferred for at least 8% annually for 20 years, he would have more than $1.2 million.
By living in a state with no income tax, our executive goes from down $500,000 to up $1.2 million.
That's a "swing" of $1.7 million.
It's a huge difference in wealth... caused by a seemingly small 10% tax.
I kept this example simple on purpose. I know not everyone is going to make $250,000 a year. And some states have tax rates of 4%, 5%, or 6%. The "swing" for a lot of people will be $100,000... $250,000... or $500,000. Still, those numbers are huge for most people.
Maybe a 20-year time frame is too long for you. So how about getting a raise next year? Don't hit up your boss for a raise. Move to a tax-free state and give yourself a raise.
For example, let's say you earn $75,000 a year... and pay 25% of your earnings to the federal government in taxes. You're left with $56,250 after taxes.
If you live in a state that taxes you an additional 6%, you'll pay an additional $4,500 in taxes. You're left with $51,750 after taxes.
$56,250 is about 8.7% more than $51,750.
If you live in a state with no income tax, you get 8.7% more take-home pay than if you live in one with a 6% income tax.
Keep this extra 8.7% per year for 10 years, and you end up with an extra $45,000 ($4,500 x 10) for yourself. Again, the large effects occur over time.
Whether it's over the short term or long term, and whatever your particular circumstances are, paying an additional 5% or 10% every year in taxes is a major hindrance to your ability to build wealth.
That's why – if you're interested in building wealth – moving to an area with no state or city tax is a "no-brainer."
It's a way to immediately increase you earnings with no additional effort. And over the long term, it can drastically affect your level of wealth.
Moving is a pain in the neck, but it's worth it.
Regards,
Brian Hunt
P.S. For reference, the U.S. states that do not have a state income tax as of 2015 are Alaska, Florida, Texas, Nevada, South Dakota, Washington, and Wyoming (Tennessee and New Hampshire have no state tax on conventional income, but tax dividend and interest income).
Further Reading:
Brian says one of the world's best investment strategies involves an unconventional way of looking at world events. And once you adopt this mindset, it will put you ahead of 99% of your fellow investors. Get all the details here: Learn to Appreciate a Good Crisis.
And in this must-read interview, Brian shares one of the safest, easiest ways to make great investments. "It's a proven wealth-generating idea that's rooted in common sense," he writes. And nobody wants to talk about it...
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