Will and I moved to Las Vegas last week.
When I say this, people often respond in three main ways:
- Confused look. “People live there?”
- Cue the casino jokes.
- Start booking their ticket.
After the initial startle, people ask: “Why Vegas?”
It’s tough to give a soundbite answer. Most people move because of job or family. How can you explain why anyone would move anywhere for other reasons?
Here’s my best attempt:
We moved here for the lifestyle. Not the gambling, obviously — but the canyons, mountains, desert, sunshine, hiking, climbing, camping, music, festivals, food and entertainment.
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I love the outdoors, especially the mountains. (I was born in Nepal; mountains are in my blood.) I lived in Colorado for 8 years and loved it, but I’m sick of winter. (You’ve seen how people in Atlanta react to snow.) I prefer cities; I like the West Coast; I’ve always wanted to live amidst palm trees.
Vegas also features — dare I say it? — low taxes, low cost of living, and the opportunity to be in both a city and state that’s rapidly expanding. Tesla is bringing 6,500 jobs to Nevada (near Reno); Zappos founder Tony Hsieh is spearheading a $350 million renovation of downtown Vegas (with varying results, but overall a solid trend). Nevada is the 7th fastest-growing state in the nation, according to US Census data from April 2010 to July 2014.
It’s an affordable, growing spot bursting with potential. Equally as important, it’s a sunny, warm, mountainous landscape that’s ideal for an outdoor, active, social lifestyle.
(See? That’s a much more long-winded soundbite than simply saying: “um, I moved here to work at CNN.”)
“Because I Can.”
If you’re a longtime Afford Anything reader, you might remember that last year I spent roughly one-third of the year immersing myself in various U.S. cities — including NYC, Austin (twice), San Diego (three times), and Las Vegas (twice, including a one-month stint here in January).
I did that for two reasons:
- Shopping for a place to live. (San Diego and Austin were strong contenders).
- Test driving the premise that my Atlanta real estate investments could operate without me. (MUCH more on that topic in this article.)
Atlanta is a great city, on the brink of becoming amazing, thanks to increasing urban density and development of pedestrian/bike paths. But after five years there, I wanted a new adventure. And to be honest, as much as I love Atlanta (and I’ll miss it), it’s not me. I like the West.
Plus, I can work anywhere with Internet. So why not? #LocationIndependence
The Last Five Years
Five years ago — when I was 26 — Will and I moved to Atlanta with one small backpack per person. We had no assets, no income, and unimpressive savings. No computer. No car. No blender or forks or pots-and-pans. We had just returned from long-term vagabonding, and started from scratch.
We hustled hard. We ate lots of spaghetti (it’s cheap!), scrutinized every dime, and rented a cramped apartment at $200 per month, per person. (Five roommates shared this space, all random people from Craigslist who, fortunately, turned out to be awesome.)
I used the last of my savings to buy a laptop. I started freelance writing, earning $15 per article. Those were lean, scrappy days.
Fast-forward five years.
Today, we’re leaving Atlanta with more than $1 million in real estate investments and a six-figure online business. We bought five houses in five years, two of which we own free-and-clear. We clear more in annual net passive income than I used to earn at my former 9-to-5 job.
I’m sharing this to illustrate that if we can make this leap — and we have no special talent, skills or connections — I genuinely believe that you can, too, if that’s what you want.
It’s been a long, crazy journey. I’m grateful that I had the support of you, the Afford Anything community — especially the readers who kept encouraging me back when I was buying my first investment property and having minor panic attacks over whether or not this goofyheaded idea could work.
As it turns out, it worked. It worked spectacularly.
Living in a State with No Income Tax
Since this is a finance blog, I owe it to you to elaborate on the ridiculous benefit of living in a state with zero income tax.
(To be clear, that’s not the reason that we moved to Nevada. But this is a finance website, so I’d be irrelevant for me to start gushing about sand dunes and canyons and the myriad of other cool things here.)
Before I launch into this, one disclaimer:
Don’t Wag the Dog
Don’t let the tail wag the dog. Figure out what you want most in life, then find ways to live your dream while earning passive income / minimizing costs.
I once received an email from a reader in a great financial position: no debt, strong retirement funds, nice emergency fund. He asked: “I’d love to backpack South America, but I can’t stop thinking about how that same money, invested at 8 percent, would grow with compounding interest over 40 years …”
I slapped myself on the forehead. (Figuratively.) And then I cried for humanity. (Also figuratively.)
That reader had forgotten the bigger picture. Money is a tool that you use to build your life; nothing more. Money is merely the ‘how.’
Don’t design your life based around pinching pennies or minimizing taxes. Yes, you might devote a few years to hardcore hustling, as I described above, but that’s only temporary. If you hold some incredible passion, like traveling across Ireland or opening an herbal tea shop or sailing the Caribbean, create a kick-butt financial plan — and then dive in headfirst.
If lifestyle you crave carries some extra costs, taxes or fees — don’t hesitate. Life is too short, too beautiful, and too precious to base every waking moment around saving money or maximizing tax strategy.
(Somewhere, a bunch of CPAs are cringing.)
We wanted to live out West. We didn’t have a specific place in mind, we just wanted to be in a spot that’s outdoorsy, and also a big city. Those wants are the “dog,” minimizing taxes (and cost-of-living) is the “tail.”
With that said, let’s dive in:
Seven States with No Income Tax
Seven U.S. states have zero income tax: Nevada, Florida, Texas, Washington, South Dakota, Wyoming and Alaska. Two more states, Tennessee and New Hampshire, have no taxes on ordinary income, but do assess taxes on dividends and investment income.
By contrast, California has a top marginal state income tax rate of 13.3 percent.
“Yeah, but that only applies to millionaires.”
Okay, let’s look at the average American. For simplicity’s sake, we’ll assume this person is single or married filing separately; the words ‘earning’ or ‘income’ below refers to taxable ordinary income after exemptions and deductions.
- In New York City, a person earning $51,000 annually pays an effective rate of 9.3 percent, or a total of $4,704 per year (which breaks down as $2,961 to the state and $1,743 to the city).
- In California, a person earning $51,000 annually pays 9.3 percent state income tax (marginal rate).
- In Oregon, a person earning $51,000 annually pays 9 percent state income tax (marginal).
- In Hawaii, a person earning $51,000 annually pays 8.25 percent state income tax (marginal).
- In Iowa, a person earning $51,000 annually pays 7.9 percent state income tax (marginal).
Minnesota, 7.05 percent. Vermont, 6.8 percent. Washington D.C., 8.5 percent. And my former home state, Georgia, has a 6 percent income tax that’s almost-flat (it applies to all income above $7,000), putting it near the national median.
“That’s only 6 percent; what’s the big deal?”
- The average American saves less than 6 percent of his/her income. Ouch. Getting rid of a 6 percent expense means that most Americans can more than double their current savings rate.
- Boosting your savings by six percent achieves half of the One Percent Challenge in one fell swoop.
Deduct My Sales Taxes? Yes, Please!
It doesn’t stop there. The benefits keep piling on.
If you itemize deductions, the IRS gives you a choice:
- Deduct your state and local income tax, or
- Deduct your state and local sales tax
You’re free to choose one or the other; just not both.
Most people deduct their state income tax, which is usually higher. But if you live in state without income tax, you can have your cake and eat it too. Not only do you enjoy state income tax savings, you also write off your sales taxes. Double-win!
What if you don’t want to track your sales tax payments? No problem. The IRS offers a tool that estimates your sales tax based on your location and income. They refer to this as “the easy route” — with an exclamation point. (This is serious, y’all. I’ve never seen an exclamation point on the IRS website before.)
Just plug in your numbers, and the IRS tells you how much to write-off. It’s easy and audit-proof, my favorite combination.
How High Are Sales/Property Taxes?
But it can’t be all roses and champagne, right? One of the biggest criticisms of tax-free states is the allegation that these states raise sales and property taxes to compensate.
In some cases, this is valid: property taxes in New Hampshire are among the highest in the nation. (That said, New Hampshire has no sales tax and no income tax, keeping the overall tax rate low.)
In other cases, however, both sales and property taxes are consistent with the amount you’d pay in an income-taxing state.
Let’s look at Atlanta vs. Las Vegas for example.
- In the City of Atlanta, sales tax comes to 8.0 percent.
- In the City of Las Vegas, sales tax comes to 8.1 percent.
The difference is 0.1 percent — hardly worth screaming about. (If you live in one of the five states with no sales tax — Alaska, New Hampshire, Oregon, Montana and Delaware — you’ll want to crunch the numbers more closely.)
Perhaps more poignantly: sales tax “penalizes” spending. Income tax “penalizes” earning. If you — ahem — earn more than you spend (can I say that with any more emphasis?), you’re better off trading one for the other.
What about property taxes? These rates vary wildly by county, and there’s no evidence that property taxes are higher in zero-income-tax states (NH excluded). In Nevada, they’re substantially lower than the national average.
Back to the Georgia vs. Nevada example:
- In Georgia, effective property tax rates range from 0.50 percent to 1.35 percent, and the statewide average is 0.94 percent.
- In Nevada, effective property tax rates range from 0.46 percent to 1.08 percent, and the statewide average is 0.96 percent.
The difference is 0.02 percent (statewide average) — and, I should add, the property tax rates Clark County (Las Vegas) are lower than tax rates in Fulton County (Atlanta).
One other crucial point: The more house you buy, the higher your property taxes. You can control this arena. The easiest way to trim this tax bill is by purchasing an affordable home.
“You’ve thrown a lot of numbers at me, Paula. What are you saying?”
- Not paying state income tax is awesome.
- Don’t assume that property and sales tax will (necessarily) be higher in a zero-income-tax state.
If you’re thinking about moving, compare your current taxes to your new load. In my case:
- Income tax is zero
- Property tax is lower
- Sales tax is the same (but its deductible, so its effectively lower.)
Verdict: Triple win!!
“How does the State of Nevada make its money?”
Hotels and alcohol, among other things. Nevada has the highest alcohol tax in the nation. Viva las Vegas!
Why Should I Care?
How important is tax reduction, anyway? How big of a difference can it make?
Let’s say that through a combination of all of the above (income/sales/property/federal deductions), you save an effective 10 percent on your taxes.
- If you (+ your spouse) earn* a combined $50,000, you save $5,000 per year. That’s most of your IRA contribution.
- If you (+ your spouse) earn $100,000, you save $10,000 per year. That’s a car. That’s a flippin’ CAR. Every. Year.
- If you (+ your spouse) earn $250,000, that’s an insane $25,000 per year. Dude, that’s someone’s salary.
(*Refers to taxable earnings.)
We felt this impact with Will’s latest paycheck.
I’m self-employed, which means I don’t see results until Tax Day. Will is a (location-independent) employee, which means taxes are skimmed from his paychecks – and his latest check was several hundred dollars bigger than usual.
I didn’t connect the dots when I saw the deposit. It took me a moment to understand why.
“Did you get a raise?” I asked.
“Yeah,” he replied. “It’s called moving to Vegas.”
Life First, Then Money
Again, I’ll repeat my disclaimer: Don’t let the tail wag the dog. Make choices based on the life you want –and then optimize this for ALL costs, not just taxes. Dog, then tail.
If your wildest dream is to live in New York or L.A. or San Fran, go live there, taxes be damned. It’s your time. Live your epic adventure.
But if you’re moving to Lake Tahoe and you’re like, “hmmm, which side of the state border should I live on?,” maybe it’s time for a different conversation.
How Does This Apply to Me?
I’m sure some readers are going to say: “Gee, that’s all well-and-good that you could move to a state without income tax, Paula. But what about those of us who have desk jobs? How is this information supposed to benefit us?”
- Learn the landscape. If you want to be educated about finance, learn the whole picture. I’ve learned plenty of information about 401k withdrawals, annuities and options trading, even though I’ll either never use this info (options, annuities), or won’t use it for decades (401k withdrawal strategies.) It’s part of a well-rounded financial education.
- Percolate on the idea. Taking a step back: what’s the benefit of education, anyway? One perk is that minimizing taxes will live in the back of your mind. When decision-making time strikes, you’ll remember to factor in taxes. For example, when your boss calls and says, “hey, I’d like to cut your salary in exchange for more stock options” — you can ask (among other things), “what are the tax consequences?,” because you’re the guy/gal in the office who thinks about those kinds of things. It’s kinda like learning about dollar-exchange rates, inflation, and lots of other invisible economic forces that affect your day-to-day life without you necessarily being conscious of its impact.
- Future application. You probably won’t work in your current job forever. When you’re contemplating offers, keep this information in mind (again, without letting the tail wag the dog).
“What About Your Properties?”
Two of the most common questions I hear (after “How long can I crash on your couch?”) are the inevitable: “Are you going to invest in real estate in Vegas?” and “Are you going to sell your properties in Atlanta?”
To the first question: *Shrug.* I don’t know. I’m not going to rush into any decisions. I’ll live here for awhile and understand the landscape.
To the second question: HECK NO! If you know me at all, I hope you’ve noticed how much I emphasize three words: passive, passive, passive. The fact that I’m getting this question so often tells me that I’ve done a piss-poor job of showing you how hands-off this real estate enterprise is. For that, I apologize. Clearly I need to step up my game, and reveal behind-the-scenes in stronger detail.
This article is now 2,849 words — and I prefer not to exceed 2,500 — so I’ll refrain from launching into this right now. Stay tuned for the sequel, in which I’ll describe (in painfully specific detail) just how I run my real estate business in less than 30 minutes per month per unit. (That’s less than 3 hours per month. Sometimes MUCH less.)
If you’re still asking, ‘How can you leave a bunch of properties on the other side of the country?’ — I’ll answer this in the next article, but for now, I’ll leave you with the short answer:
- I hustled hard for the first few years, so that I could kick back and enjoy a hands-off business in the future. (That future is now.)
- I shifted from a DIY mentality (which I used to carry in spades) to a build-an-awesome-team-and-create-killer-systems mindset. (My team is awesome. The properties are in proven, trusted hands. My systems are pretty darn good, too.)
- I accepted that I could either maximize ‘profit’ by handling everything myself, or I could create a passive business that brings me more freedom, but not both. (Money vs. time: I could afford anything, but not everything.) I prioritized passive.
- I understood that passive is not ‘free money;’ I had to invest the hours upfront.
- I built mega-cash-reserves.
- I made “small bets” — stepping away from my real estate business for a few weeks, then a few months, then (finally) 1/3 of the year — to test-drive the experiment and make changes accordingly.
That’s the short answer. Details coming in the next post.
(P.S. Check out the awesome on Instagram)