Washington DC Taxes
Should you move to Virginia or Maryland for tax reasons?
I often see other wealth management companies ignore taxation issues. An assumption that it is what it is.
Such an approach is lazy! Taxes are the single largest expense for high-net-worth and affluent families. The average family pays around 28% in federal and local taxes, while those earning more than $200,000 pay around 30-32%. Sales taxes can add another 7% to your day-to-day spending. And if you own your own business, there are also corporate taxes to contend with
It’s not uncommon for families to find themselves spending up to a third of their income on taxes
That’s why I always tell my clients to pay attention to taxes.
Few wealth managers seem to pay attention though. That’s because they believe it’s the CPA’s job to help you make the big tax decisions.
But ironically, most CPAs believe it’s the wealth manager’s job!
To be fair, both wealth managers and CPAs will nibble at the edges of tax issues. A CPA might help you write off expenses or harvest capital losses. A wealth manager might help you establish a 529 college savings plan for your child.
But their circular logic means that no one is advising you on the big stuff.
What is the big stuff?
Your state of residence is certainly a big one!
While federal taxes make up ~65% of all government revenues, the remaining 35% comes from a combination of state and local taxes. And some states have zero income taxes.
Other life decisions can also significantly reduce your tax burden. But in this article, we will explore whether Washington DC residents can reduce taxes simply by moving into neighboring Virginia or Maryland.
Wealth Management and Taxes
Washington DC, Maryland, and Virginia
Those living in the DMV area are granted a very special benefit. Besides the NYC area, the Metro Washington DC area is one of the few places in the US you can easily choose your tax location based on where you live.
The population of Washington DC doubles during the workday thanks to commuters coming in from Maryland and Virginia.
Furthermore, a large number of people working in Washington DC maintain residences in a different home state. They may visit DC as consultants, politicians, or project-based workers. Yet by spending less than 183 days per year in the Washington DC area, they can often still file tax returns in their home state.
In this article, we will examine the tax rates of Washington DC, Virginia, and Maryland.
The five key taxes we will cover in this article are:
- Sales Tax
- Income Tax
- Property Tax
- Capital Gains Tax
- Estate Tax
- Corporate Tax (bonus)
In the process, we will cover whether moving to a different state is right for you. And if you want to learn more about the quirks of wealth management in Washington DC, see my longer article about wealth management in Washington DC.
1. Sales Tax
Sales tax is an often-forgotten expense that nevertheless adds a significant cost of living. Interestingly, all three regions have similar general sales tax rates, although there are some subtle differences.
|General Sales Tax||6%||6%||4.3% state + 1% local = 5.3%|
Add 0.7% for Northern VA
|Vehicle Tax||6% of fair value|
0% for hybrids
|6% of sale price||4.15% of sale price|
|Restaurant Meals||10%||6%||5% (varies by county)|
For those living in the DC beltway, the general sales tax is relatively consistent at 6%. You will find some differences in gas, vehicle, and alcohol sales taxes.
But in general, there is not much reason to move residence in order to benefit from lower sales tax. You may, however, decide to register a car in Virginia instead if you have the option.
Winner: Virginia (marginal)
2. Income Tax
With income tax, the fortunes of those living in the DMV area start to diverge. Due to a combination of having both state and local taxes, residents living in Maryland see far higher tax rates than their peers. Those living in Montgomery County face an additional 3.2% income tax in addition to state and federal taxes.
|$0||4.00%||2.00% + 3.20% (local) = 5.2%||2.00%|
|$50,000||6.50%||4.75% + 3.20% (local) = 7.95%||5.75%|
|$100,000||8.50%||4.75% + 3.20% (local) = 7.95%||5.75%|
|$350,000||8.75%||5.75% + 3.20% (local) = 8.95%||5.75%|
|$1,000,000+||8.95%||5.75% + 3.20% (local) = 8.95%||5.75%|
Note that when selecting a tax locale, those living in Washington DC for less than 183 days per year are permitted to file taxes in their home state. This is ideal for those living in low tax states.
The following states, for instance, have zero state income tax. Filing in a home state can be a great option for people who only travel to DC for work.
- South Dakota
3. Property Tax
For those living in the DC area, property taxes vary greatly between states as well as local municipalities
Often, my clients also buy real estate as investments. In these cases, taxes often dictate where they consider buying. That’s because cap rates (the ratio of annual rental income to purchase price) tend to be quite low in the Washington DC area. Therefore, even a 1% difference in tax rates can mean the difference between breaking even or going into the red.
|Property Tax||Average of 0.56% district-wide||Average of 1.1% state-wide||Average of 0.8%|
|Tax calculation||Assessed value||Varies by county.|
Montgomery County: 0.93%
|Varies by county.|
|Property Sales Tax||1.45% above $400K||1.0% county transfer tax (Montgomery)|
0.5% state transfer tax
0.69% state recording tax (first $500K)
Washington DC actually has very favorable taxes compared to neighboring Virginia and Maryland counties. Despite a 0.85% published tax rate, DC residents only pay around 0.56% on average thanks to generous deductions and credits.
Winner: Washington DC
4. Capital Gains Tax
On average, states add 5% to the capital gains tax rate. This can greatly affect both retirees and those who earn a large portion of their income from investments.
|Capital gains tax||9.0%||5.8%||5.8%|
Here is a case where living in Washington DC can cost you. With a 9% rate, DC ties with Vermont for the fourth-highest capital gains rate, after California, Minnesota, and Oregon.
5. Estate Tax
For those planning to pass wealth down through generations, estate taxes can be a major concern.
Many federal efforts have attempted to repeal this “double taxation,” but the estate tax has survived since its modern-day enactment in 1916.
|Estate Tax||16% for above $5.6MM||16% for above $5MM||None|
This is a case where Virginia truly shines. The state has had a 0% estate tax ever since its repeal in 2007. Those looking to retire in the DMV area should seriously consider moving to Virginia.
Besides having a strong elderly service and health industry, those retiring in Virginia can expect to see their estate pay far less than their DC or Maryland peers.
6. Corporate Tax (bonus)
Finally, for those who own their own business, Washington DC, Maryland, and Virginia have different corporate tax rates as well.
|Corporate tax rate||8.25%||8.25%||6.00%|
Those looking to establish a business should consider locating it across the river in neighboring Arlington, VA if possible.
Should you move?
When considering taxes, the clear winners are either Washington DC or Virginia.
You should move to Washington DC if…
- You have significant assets and want to avoid local capital gains taxes
- You want to lower property taxes
You should move to Virginia if…
- The majority of your income is from W-2 salary, and want lower income taxes
- You own your own business and want lower corporate tax rates
- You are in your twilight years and want zero state estate taxes
And what about Maryland?
It is unsurprising that Kiplinger ranked Maryland as the #2 worst state for taxes, right behind #1 Minnesota and ahead of #3 New York. While Maryland may have its benefits (such as access to some good school systems and transportation), it is an expensive state to live in from a tax perspective.
I never dissuade my clients from living in Maryland. My goal is just to show you how much it will cost to live there. As long as it is worth it to them, that extra 2-8% contribution in taxes can be well worth it.
However, for those with the flexibility of where they live, I strongly recommend considering Virginia or Washington DC as a home base for taxes.
How can we help?
If you’re looking for advice about your own finances, you can contact us for more information. We at Jurnex Financial Advisors are asset managers who specializing in helping families and individuals navigate major life changes. If you want to get started in regaining confidence over your wealth, book a meeting with us today and see how we can help.