Does Virginia, Washington DC, or Maryland Have the Most Favorable Taxes?

Question: I recently got a job in the DC Metro area and will be moving to the area next year. I am open to living in Northern Virginia, Washington DC, or Maryland and want to know which jurisdiction offers the most favorable taxation. 

Answer: Congratulations on your new job (Amazon HQ2?)! There must be a lot going on in your mind right now like whether you’re still young enough to offer your friends pizza and beer to help you move.

 

For years I’ve looked for a good resource to send clients in response to this question and couldn’t ever find it, so I reached out to my CPA, Klausner & Company located in Arlington VA, who I highly recommend, to come up with a detailed yet simple chart to compare taxation between Virginia, Maryland, and Washington DC across different incomes. So with that, I will turn this week’s column over to Chris Light and the tax experts at Klausner & Company, enjoy!

 

First thing’s first, Virginia, Washington DC, and Maryland all have reciprocity with each other. This means that if you live in one state and work in the other, you only have to worry about paying taxes and filing a tax return in the state that you live in.

 

Let’s analyze the tax outlook of three different people who have just landed new jobs as employees in the DC Metro area:

  • Bobby’s AGI is $85,000. Bobby has a vehicle valued at $18,000 and a home valued at $450,000.

  • Sarah’s AGI is $150,000. Sarah has a vehicle valued at $35,000 and a home valued at $800,000.

  • Chris’s AGI is $300,000. Chris has a vehicle valued at $65,000 and a home valued at $1,200,000.

 

Important Notes

AGI, Adjusted Gross Income, is a term to describe a person’s income minus some specific deductions. Bobby, Sarah, and Chris’ AGI are all based on salary earned by the end of 2018. AGI is used to determine taxable income, as seen in the ‘Math’ chart below. Taxable income determines which income tax brackets they fall in.

 

They are all taking the standard deduction. Virginia and Maryland property taxes vary by county and city/town, so the table below uses Arlington County rates for Virginia and the average Montgomery County rate for Maryland. Now let’s crunch some numbers:

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Summary of Findings

Washington DC yields the least amount of taxes from Bobby and Sarah, the comparably lower and middle-income earners. This is thanks to its mirroring of the federal standard deduction, lower real estate taxes, no tax on groceries, and no vehicle property taxes. Chris, the highest earner of the three, finds that Virginia will provide him the most tax relief. This is mostly due to Virginia’s income tax cap at 5.75% compared to Washington DC’s highest rate of 8.5% for the bulk of his income. Maryland’s lower standard deduction, extra local income tax rates bundled with higher real estate tax rates push it past Virginia as the highest taxes of the three for each income level we analyzed.

 

What About Renting?

What if Bobby, Sarah, or Chris were considering renting an apartment near the metro? If we consider apartments with comparable rents and close enough to public transportation they don’t need a car, that will take real estate and vehicle property taxes out of the equation. This would push Virginia well into first place for the cheapest place to live for all of them.

 

What If I’m Married?

How does marriage impact the equation? Let’s say Bobby got married and had a kid during 2018. Using the Standard Deduction and Exemptions table (below), it becomes apparent that even though Washington DC has no exemptions or child credits, its $24,000 standard deduction is enough to keep Bobby’s family’s taxable income lower than it would be in Virginia or Maryland (assuming Bobby doesn’t have A LOT of kids). Maryland on the other hand has a sizable exemption at $3,200 per person (see below). However, Maryland’s extra local income tax rates are the reason that its income taxes are not lower than Virginia’s at any of the levels of income that we analyze.

If you really can’t decide which jurisdiction to live in, remember that Virginia has the lowest alcohol tax, meaning you can splurge on an extra nice bottle of champagne to celebrate your new job and new home!

Thank you very much Klausner & Company for finally providing people with an easy to understand breakdown of taxation in the DMV. For those of you in need of CPA services for yourself or your business, I am a loyal, happy client and I can’t recommend them enough. They provide specialize in tax services for individuals and small business and have over 40 years of experience in the Greater Washington area.

Once you’ve taken advantage of the provided tax information and would like to talk about the non-tax related questions you have about where to live, please reach out to me at Eli@EliResidential.com. Our team has worked with buyers from all over the country and the world to find the right neighborhood and we’re happy to help you too.

Below are some additional details and comparison tables outlining the tax rates in each jurisdiction.

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