My favorite income tax calculator has recently become the one smartasset has on their website. The site is definitely a favorite of mine and I hope to see them grow more. Their income tax calculator is a quick and easy way to understand how your money decisions affect your taxes.
It has a little section under “Advanced” where you can enter your deductions such as:
- 401k (same as 403b)
- Itemized deductions
- Personal Exemptions
Playing around with the numbers and looking to see how your taxes and your take-home pay change is a great way to get a feel for our tax system. No matter how good you are with numbers, it’s tough to wrap your head around the math sometimes. Seeing a quick math helps that out.
State Income Tax Calculator
Many income tax calculators only let calculate your FICA (Medicare and SS) taxes and Federal income taxes. They don’t account for state income taxes which is a pretty hefty bit for many of us.
This calculator let’s you do all of that, with an easy interface. I’ve been playing around with it for a while. Here is an example of income taxes on $125k in Portland, Oregon versus Vancouver, WA.
Portland, OR Income Taxes
Oregon has very high state income taxes, on par with CA and NY. If I earned $125k/year then this is what my tax summary would look like in Portland:
Federal income taxes stay the same. I would be in the 24% tax bracket. Because the tax code is marginal, it would be an effective (or actual) tax rate of 17%.
FICA is the is Medicare and SS which is different if you are self-employed versus and employee. As the latter you are responsible for a little over 15%. As an employee you only pay half – 7.65%.
State income taxes come out to a little over $10k. That’s $830/month. Nothing to sneeze that. Investing $833/month in index funds or use it to pay down the mortgage on an investment property and you’ll be sitting pretty in retirement.
Vancouver, WA Income Taxes
Vancouver is a bike ride up the 5 freeway from Portland. I used to bike to the Cascade Park Kaiser Urgent Care from my place in Portland. Scenic route and a great exercise.
Again, same Federal income taxes and same FICA. But no state income taxes. $0. Washington is a state which imposes no income tax on its residents. As long as you can prove to the IRS that you are a resident of that state, you can pocket $10k a year.
Or think of it this way, you can live for free in Vancouver if you find a cheap rental. This is ideal for the digital nomad physicians. You can do your healthcare consulting, your telemedicine, or any other kind of remote work from the Couve.
Tax Friendly States
smartasset Does a good job of summarizing how each states performs in terms of tax breaks. Just because a state is a zero-income tax state, it doesn’t mean that it’s fully tax friendly.
You don’t just get taxed on your income but there are other taxes to consider:
- property taxes
- capital gains taxes
- estate taxes
- sales taxes
Making Tax Decisions
I’m not a fan of making isolated decisions when it comes to your finances. Our lives are more complex than a spreadsheet. You might hate living in Vancouver. You may not want to consider a move from AZ to NV for a 4% income tax savings.
But a tax strategy is great for the physician who is on a turbocharged path to building their wealth. During this wealth accumulation phase they might be willing to cut out everything superfluous.
Another common dilemma which young physicians face is whether they should pay down their debt or contribute to their retirement accounts. “Should I max out my 401k or use that money to pay down my debt?”
Playing around with the numbers on the smartasset calculator helps you get a little closer to that answer. In fact, there is no answer to that question, it’s as individual as which residency on should choose after medical school.