Cost of Living Calculator: Many People Overlook Taxes
As a Certified Financial Planner (CFP), CPA and founder of Montgomery Taylor Wealth Management, I have some important advice for retirees: Don’t overlook taxes when calculating your cost of living!
We see this happen often in retirement planning, and tax in Santa Rosa, CA (and California in general) can be steep! Taxes should be a major element of any financial plan, and determining your tax planning strategies for retirement is key! Forget them, and you can be in for a shock later on when you don’t have as much money as you may have thought!
Taxes seem to be especially overlooked when planning to relocate in retirement. Some retirees get distracted by the excitement, challenge and what-ifs of a move that they forget to consider their new tax rates and laws. Others assume taxes will be the same wherever they go, which is not the case!
Another issue we’re seeing is more and more people are turning to online cost-of-living calculators, which can be helpful, but they have their limitations. For example, while these online calculators can crunch general expenses and offer an approximate answer to how far your money can go in a specific state or town, such as the cost of rent, groceries and other common consumer goods, they can’t factor in your total tax load, because they don’t understand your specific situation. They work based off of computer-generated algorithms, not by talking with you.
On top of that, there are many different categories of taxes that can change based on your income. Read our recent blog post: 5 Types of Taxes People Forget to Consider – And How They Affect Your Financial Plan.
Make sure to discuss taxes with your financial advisor when creating your financial plans so you incorporate as much pertinent information as possible, especially related the cost of living of a new location. An online calculator can be a good place to start, but make sure to get a second opinion so you’re using accurate projections in your plan.
Are you missing something in your retirement plan? Contact Montgomery Taylor Wealth Management to see how we can help.
State taxes can be extensive and highly varied.
For example, the IRS taxes retirement withdrawals. Not every state does the same, but many, including California, do. In California, both pension and retirement withdrawals are liable for state taxes, which can cut further into your income during retirement. California’s state tax rate is 7.25 percent, the highest in America.
Local taxes are in addition to state and federal taxes. Like state taxes, local taxes vary widely and can include a range of different costs. Sometimes local taxes are permanently a flat rate, but occasionally, local income taxes can be imposed for a temporary short-term purpose.
Both residents and nonresidents (those working in a particular area but not living there) are responsible for local income taxes. Nonresidents pay only on money earned within the municipality, where residents pay taxes on any and all income, no matter where it is earned. However, residents who work in a different municipality with a different income tax may receive a credit for those tax payments.
It’s important to stay on top of local taxes, whether you’re an employer or employee. As a business owner, you are responsible for setting up the proper withholding for your employees.
Property taxes are another important element to consider, as they can be especially high in some areas of California.
Go Beyond a Calculator: Talk to a Financial Advisor
As you can see, taxes can be confusing, overwhelming and expensive, but avoiding them doesn’t make them go away! To make tax planning even more complicated, there are many layers of additional nuance and critical financial details that will make your situation unique.
- What tax bracket do you fall into?
- What’s your filing status?
- Do you own your home?
- Do you qualify for any exemptions?
- What type of retirement plan are you making withdrawals from?
Planning for these expenses not only helps you budget today, but in the future. There are many retirement planning strategies that can help you keep more of what’s yours.
- Will charitable giving offer tax benefits?
- How should your estate plan be designed?
- Does your small business make you eligible for additional deductions?
- Are you eligible for tax credits?
Depending on where you settle, relocating in retirement can be more expensive – or more affordable – than you may think!
At Montgomery Taylor Wealth Management, we marry both wealth management services and CPA practices to your benefit, which allows us to be more pro-active than your general financial planning firm. We see your numbers. We know your numbers. And knowing your financial situation each year by working with you and your taxes, we get to understand and can leverage that information into so many other areas of wealth management that can really be beneficial to you. We can help you be more tax-sensitive and do things that are in your best interest so you can retire comfortably and feel secure. As tax advisors, we can also help you understand what you can contribute to a retirement plan each year and when it comes to taking money out, we can help you understand exactly what the rules are, and what you have to take out and what you leave in on a tax-deferred basis.
Montgomery Taylor Wealth Management is a Santa Rosa-based financial planning firm that serves the greater Sonoma County area. If you’re retiring to or from Sonoma County in California, the team at Montgomery Taylor Wealth Management can help you create a comprehensive financial plan that can support all of your short-term and long-term goals. Contact us to get the conversation started.