Recently, the news has been filled with frequent stories about the differences in California vs Nevada taxes and why it’s causing people to leave the Golden State.
While there are a number of reasons, one of the most promising is the lure of greater affordability due to substantial differences between Nevada’s and California’s taxes.
Nevada state taxes hold a massive advantage over tax rates in California for several reasons:
- Nevada does not have a state income tax
- Nevada has no inheritance or estate tax
- Nevada does not tax retirees’ accounts or pensions
- Nevada sales tax is less than in California
For many people who are considering a financially-based move from California to Nevada, an adequate understanding of how tax structures can affect them is important to their decision-making.
Thus, we crunched the numbers and present a concise yet thorough analysis of state taxes in Nevada compared to California.
Below is a summary of state tax rates in Nevada compared to California.
State Income Tax
California is notorious for having the highest state income tax bracket in the nation, with a top marginal income rate tax of 12.3%. However, this rate does not include an additional 1% surcharge for tax payers with incomes over $1 million per year, making their top marginal tax rate 13.3%.
Meanwhile, Nevada has no state income tax. This accounts for a significant tax savings and is one of the primary reasons why many Californians are heading east in recent years.
Taxes on Retirement Accounts & Pensions
While income taxes are one of the primary considerations, another important point of reference is taxes for retirement accounts and pensions.
California residents must pay taxes on all income from retirement accounts and pensions. Additionally, because California taxes retirement at a person’s income tax level, the California retirement tax is one of the highest in the nation for many taxpayers.
It’s no wonder why retirees are leaving California by the thousands for states that are more tax-friendly. In California, all private, local, state and federal pensions are fully taxed, and there is an additional 2.5% tax penalty on early distributions and qualified pensions.
By comparison, Nevada does not tax any retirement income. This is a huge benefit for individuals nearing retirement and a reason many of them are flocking to the Silver State.
Sales Tax California vs Nevada
Consumers in California are hit with a sales tax of 7.25%. Local sales taxes increase this total, with the largest total rates hitting 10.5%. This adds a significant toll to purchases.
Nevada’s sales tax is much smaller by comparison. The state sales tax in Nevada is 4.6%, which is 2.65% lower than its neighbor to the west. Like in California, different cities and municipalities often add in local sales taxes. See the Las Vegas sales tax rate.
This bring the highest possible total sales tax in Nevada to 8.375%, which is still over two percent cheaper than California’s highest rates.
Three of the biggest commodities that fall under the Excise or “use tax” in Nevada and California are gasoline, cigarettes and alcohol.
These types of taxes are important sources of revenue for governments and are often leveraged in order to assist with funding. However, they can also vary considerably from one state to another as is the case with California and Nevada.
In California, gasoline is taxed at the highest rate in the nation, adding an additional $0.53 cents to the price of each gallon of gasoline, one of the primary reasons why California’s gas prices are often $1 or more per gallon than in Nevada.
In fact, California has increased their gasoline tax twice in the past three years for a total of 17.6 cents, indicating a willingness to continue to tap into consumer’s pocketbooks at the pump. Meanwhile, Nevada taxes gasoline at $0.23 per gallon, less than half the tax levied by California.
Buying cigarettes in California will also put a hurt on consumer’s wallets. The state adds an extra 65.08% tax on each pack sold. Cigarette taxes are much lower by comparison in Nevada, with a 30% tax per pack.
California vs Nevada Property Tax
California and Nevada are similar in real estate and property tax rates; however, it is important to keep in mind is that homes in California are typically much more expensive than in Nevada.
With California having higher property values, this means that California homeowners will pay much larger total taxes despite similar rates.
In California, the average effective tax rate is around 0.79%. Proposition 13 mandates that the maximum tax on real estate is limited to 1% of its full cash value and that taxes cannot increase more than 2% over the previous year.
Nevada’s average state property tax is 0.69%. Thus, both California and Nevada are among the nation’s lowest in terms of property taxes, quite a bit below the national average of 1.08%.
Capital Gains Tax
Capital gains tax is something quite familiar with those who make investments in stock and real estate. For investors, it is important to understand state policies on capital gains.
In California, there are no special provisions for long-term gains on assets, which means that if you sell an asset or property at a profit you will end up paying taxes at your personal income tax rate.
For those of you who fall into the top 13.3% tax bracket, when combined with the federal long-term capital gains tax of 20%, this tax rate comes to a combined total of 33.3%. This would amount to the second-highest capital gains tax in the world.
Meanwhile, Nevada does not have a state tax on capital gains, meaning that Nevada taxpayers will only pay the federal long-term capital gains tax of 20%. For investors, the move across the border can result in retaining significant earnings due to this fact.
Selling Your Home & Capital Gains
When it comes to capital gains taxes on real estate, there are a few loopholes which help the home seller.
If you’ve lived in your home as a primary residence for at least two of the past five years, you can receive some profit tax-free. Married couples pay no tax on the first $500,000 in profit from the sale of their home while single filers pay no tax on the first $250,000.
However, with tax legislation increasingly aimed at raising revenue, these tax breaks may not be permanent. There is always potential for legislators to allow this to revert back to late 1990s when there was no exemption on profit.
Many homeowners in California sitting on appreciated value and profit are making the smart choice to sell now and get out before the state comes back asking for more money.
California vs Nevada Taxes Summary
Overall, the smart money is on Nevada whose tax bases are much less than California including the absence of an income tax and much lower median home values which translate to significant savings on property taxes.
It is no surprise so many Californians are making the decision to move to Nevada, particularly as they consider retirement.
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