MONEY income

The 10 Richest Counties in America

Jackson Hole, WY
A Jackson Hole mansion in Teton County, Wyoming. Jonathan Adams—Getty Images

Newly released IRS data shows where in the U.S. top earners live.

Teton County, Wyoming, tops the list for highest average income in the United States, according to updated Tax Stats data just released by the IRS.

The average income in Teton—known for hiking, skiing, and multimillion dollar Jackson Hole ranches—is nearly $300,000. Compare that with $62,483 for the average American household.

Of course, average income figures don’t give you a good picture of how much a typical resident makes, since super-rich outliers can skew the data (median figures were not released), but this list gives you a good idea of where many of America’s millionaires and billionaires hang out.

Sterling, Texas, places second on the list and carries yet another distinction—the highest average tax liability in the country. Only 600 returns were filed in the county, but the average tax owed was a whopping $97,387.

County State Average Income
Teton Wyo. $296,778
Sterling Texas $266,563
McMullen Texas $211,059
New York N.Y. $191,847
Pitkin Colo. $173,299
Fairfield Conn. $157,601
Glasscock Texas $145,031
Marin Calif. $143,333
San Mateo Calif. $143,203
Westchester N.Y. $137,695

 

Note: Dollar figures represent mean adjusted gross income for 2012, the most recent data available.

MONEY

Hey, If Companies Can Change Their Citizenship To Get a Tax Break, Why Can’t I?

140718_INV_Inversion_1
Getty Images/age fotostock

A big merger turns an American company into a foreign one, and cuts its taxes. Nice trick if you can pull it off.

This morning AbbVie, a big pharmaceutical company based near Chicago, announced it agreed to acquire Shire, another drug maker that is often described as being based in Ireland. It’s actually incorporated on the small island of Jersey, a British Crown dependency. As part of the deal, AbbVie will incorporate in Jersey too, and as a result get what looks to be a pretty sweet tax break. The company’s “effective” tax rate, reports USA Today citing regulatory filings, would fall to 13% in 2016, compared to 22% last year.

And the great part is, the people who run the new company will get to stay in Chicago. Jersey’s nice, but with a population of about 90,000, and the English Channel on all sides, it’s a little inconvenient. For everything besides taxes, that is.

Allan Sloan just wrote an epic cover story for Fortune (which like Money.com is owned by Time Inc.) about the growing trend of companies switching their on-paper country of residence to avoid paying U.S. corporate taxes. Recently, the Obama administration has called on Congress to find a way to crack down on the practice, known as “inversion.”

So here’s a question: How is it that corporations can so easily change their legal address to get a tax break, but the rest of us can’t? (Not that we want to. We’re patriotic, fair-share-paying Americans… but still.)

The simple answer is that corporations are legalistic fictions. You could theoretically move and switch passports, but you’d miss your family and your favorite baseball team, and your employer might wonder why you’re not at your desk. Besides, explains Eric Toder of the Tax Policy Center in Washington, D.C., to do a inversion you need to find an overseas company to merge with, such that 20% of the new combined entity is held abroad. Sort of hard to slice-and-dice yourself that way. A company can go “live” in Jersey and still visit its U.S. customers every day, still employ people here, and still let the CEO keep his season tickets to the opera in New York or Chicago or Boston.

Corporations may be people these days, as the Supreme Court would have it, but they are magically incorporeal ones.

Behind the ghost-like corporate entity that lives abroad, of course, there are lots of actual flesh-and-blood people who live right here in the U.S. of A. So one answer to the question “Why can’t I get this tax break?” is that you can: Just own shares of a company like AbbVie that’s a good candidate for inversion. When corporations pay lower taxes, most of the value of that accrues to the shareholders, says Toder. So if you own some stocks, you get a piece of the action when corporations invert. But it’s probably a very small piece because you have to own a lot of stock to be paying much in the way of corporate taxes.

In other words, inversion isn’t a tax break for “corporations.” It’s a tax break largely enjoyed by wealthy households. Here is how much the Tax Policy Center estimates people pay in corporate taxes, based on income.

image-13
SOURCE: Tax Policy Center

You need to get to people earning over $100,000 per year before corporate taxes start taking more than a 1% bite, and the really noticeable burden of the corporate tax falls on people above the $500,000 level. They pay more because they’re the ones who own shares. (How do people earning less that $10,000 end up with some corporate tax? TPC attributes some of the cost of corporate taxes to workers getting lower pay than they would otherwise.)

When companies find tax loopholes, it effectively lowers tax revenues from higher earners, and means the government has to find other ways to raise money instead.

One way to stop companies from “inverting” is to lower U.S. corporate rates, which are high compared to the rest of the world, perhaps paying for it by closing tax preference enjoyed by some but not all companies. (Many companies are good enough at working the tax code that the “effective” taxes that are actually paid by U.S. firms is more in line with international averages.) And that’s part of the long-term solution even the White House says it wants.

But Congress moves slowly, while corporations are light on their disembodied feet. Too bad the rest of us can’t move that fast.

MONEY Social Security

Why Taxing the Rich is the Wrong Way to Fix Social Security

ERROL FLYNN as Robin Hood
Errol Flynn, as Robin Hood, leading an early fight against income inequality. WARNER BROS/RGA/Ronald Grant Archive/Mary Evans—Everett Collection

It may feel good to jack up payments by wealthier earners, but Social Security is a safety net, not a tax collector.

How do you categorize the money that comes out of your paycheck to fund Social Security? Do you consider that deduction to be a tax, or a mandatory contribution into a retirement account, or an insurance premium?

For many people, the answer is a tax. That’s what I heard from the majority of readers who responded to my most recent column, “3 Ways to Fix Social Security and Medicare.” It’s an understandable view. After all, the Social Security payroll deduction is commonly referred to as a FICA tax. (FICA is the acronym for Federal Insurance Contributions Act.) And because it’s called a tax, these readers think that Social Security reforms should focus on making wealthier wage earners pay more into the system. Making all wage income subject to payroll taxes would solve between 75% and 80% of the system’s funding shortfall.

I don’t agree with this approach, as I’ll explain. Still, these readers have plenty of company, including some leading critics of Social Security, who argue that payroll taxes are less progressive than the federal income tax. Everyone who works in a job that is covered under Social Security rules pays the same rate: 7.65% of their earned income up to an annual ceiling of $117,000 in 2014; the level is increased annually for inflation. Employers pay another 7.65%. (These totals include 6.2% for Social Security and 1.45% for Medicare.)

The way Social Security’s benefits are designed, at this year’s $117,000 income level, you receive the maximum credit—those earning higher salaries would not qualify for any more benefits. That’s why requiring wealthier people to pay even higher taxes without any additional income would break the implicit bond between your contributions and the benefits you may receive. And the move would certainly undermine support for the program.

Whatever Social Security lacks in progressive taxation it more than makes up for in the benefits it pays out, which are heavily weighted toward lower earners. Here’s how: The program breaks a person’s lifetime earnings history into three dollar segments that are divided by so-called “bend points.” Adjusted annually for inflation, the bend points are $816 and $4,917 in 2014. For the first $816 of your lifetime average monthly Social Security earnings, 90% are credited toward your monthly benefits. Between $816 and $4,917 in earnings, only 32% are applied to benefit entitlements. And for average monthly lifetime earnings above $4,917, only 15% are counted in determining your monthly retirement benefit.

Add it all up, and lower-income retirees wind up with Social Security benefits that make up a much higher portion of their pre-retirement incomes, typically 50% or more, than wealthier households, which may receive less than 20% of income from these benefits.

That payout usually exceeds the amount that lower-income beneficiaries put in, according to research by the Urban Institute, a Washington non-profit. (That’s notwithstanding the mantra of groups pushing to protect and even expand Social Security: “It’s Your Money; You Paid for It.”) The difference between the amount lower-income households pay and the benefits they eventually receive comes out of the pockets of higher-paid workers.

Of course, balancing Social Security by jacking up payments by wealthier earners feels good to many people and may even seem fair. But let’s try a thought experiment. What if Social Security worked like a 401(k) plan—you contributed a percentage of your salary, often matched by an employer contribution, and the account grows tax-deferred until you withdrew it at retirement. If I put $5,000 a year into my 401(k), but you earn more and can put $20,000 into yours, is this unfair? Should some of your contributions be placed instead inside my 401(k) simply because you make more money?

If you think Social Security is different from a 401(k), then you must also be viewing it at least in part as a welfare program that should be taking assets from the top 10% and distributing them to the other 90%. I don’t share this view, but I would support boosting the earnings ceiling by a hefty amount. Payroll taxes used to catch 90% of all wages. After years of lopsided wage gains by wealthier persons, only a little more than 80% of wages is currently subject to payroll taxes. It would be a reasonable move to restore the original level of taxation.

Even so, Social Security’s primary mission is to provide retirement security—a safety net that would help keep aging Americans out of poverty. It was not supposed to be a tax collector. That’s why I think the best way to look at the program is as a form of insurance for longevity, rather than an investment that should give you a better-than-break-even rate of return.

So if you believe that wealthy people should pay higher taxes, change the tax code. Don’t look to Social Security to do this work for you.

The Committee for a Responsible Federal Budget, a Washington non-profit, has a Social Security calculator showing reform options and their impact. If you use this tool, we’d like to hear how you would reform Social Security, so please share your ideas. We’ve all got a stake in this.

Philip Moeller is an expert on retirement, aging and health. He is an award-winning business journalist and a research fellow at the Sloan Center on Aging & Work at Boston College. Reach him at moeller.philip@gmail.com or @PhilMoeller on Twitter.

MONEY

Career Lessons from LeBron James and Carmelo Anthony

Miami Heat LeBron James and New York Knicks Carmelo Anthony
Miami Heat forward LeBron James is returning home to the Cleveland Cavaliers and New York Knick Carmelo Anthony is staying in New York. Brad Penner—USA Today Sports via Reuters

There is a lot more to relocating for a job than a bigger paycheck

Fair enough: There’s a limit to what mere mortals can learn from the career decisions of people who can routinely hit three-pointers under pressure or jump over other world-class athletes to dunk basketballs.

But a closer look at the high-profile decision-making process of NBA superstars LeBron James and Carmelo Anthony over what teams they’ll be playing for next season reveals that they grappled with questions that many of us face when deciding whether or not to take a new job.

Should you always take the higher salary?

If salary were the only factor when Anthony was weighing whether to stay with the New York Knicks or move to a new team, his decision would have been clear days or weeks ago. After all, the Knicks offered Anthony more than $120 million over five years to stay in New York vs. “just” $96 million from the Los Angeles Lakers and $75 million from the Chicago Bulls for four-year contracts. That comes out to $25.8 million a year to stay with the Knicks, $24.3 million to join the Lakers and $17.5 million to be a Bull.

But other factors apparently gave him pause. The Bulls are considered the team with the best shot at a championship next year, so a move to Chicago could have boosted Anthony’s chance at post-season glory. And Los Angeles might have provided better job opportunities for his budding actress wife, La La Anthony. In the end, it appears that money ultimately swayed Anthony to stay with the mediocre Knicks.

And while we don’t yet know all the details behind LeBron James’ decision to go to the Cavaliers, staying in Miami could have meant a pay cut if the team needed to make room for more high potential players.

In any case, it’s worth considering the possibility that joining a company that’s on a faster track or at top in its industry can pay off in the long run, even if it means less money upfront. Rosemary Haefner, VP of human resources for jobs site CareerBuilder, says you should make sure you see a clear opportunity to add skills that will advance your career or otherwise help you move you up the ladder faster — or that you’ll be able to accomplish something that will make you more attractive to future employers. That could mean a chance to add management experience to your resume, work closely with the top brass, or be part of cutting-edge projects.

Should I consider cost of living?

If you consider moving for a new job, take care that a higher cost of living in the new city won’t eat up any additional pay, warns Erol Yildirim of the Center for Regional Economic Competitiveness, which publishes a quarterly cost of living index for the U.S. “There’s a lot more than income that affects your standard of living,” he says. That may not be such a big deal for someone like Carmelo Anthony, even though New York City is regularly at the top of the CREC list, with the after-tax cost of living in Manhattan at twice the national average.

Housing is the biggest expense (for most people about 30% of income goes to home-related expenses). The index also takes utilities, groceries, transportation and health care into account. You can use salary data provider Payscale’s cost-of-living calculator, which will not only show you the cost-of-living difference, but how much you need to make in the new location to maintain your current standard of living.

Do taxes matter?

Taxes can take a big bite out of your income. You can’t escape taxes altogether, of course, but some places are friendlier than others. LeBron James, for example, is leaving one of just seven states that has no income tax. In New York, Anthony will be in one of the highest taxing states in the U.S. New York City is one of the few cities in the U.S. that has its own income tax and New York state has the eighth highest state income tax rate. Beyond income taxes, you should factor in property taxes and sales taxes too. You can find details for taxes on income, property and retail sales for every state at the Tax Foundation.

Is job security more important than a bigger paycheck?

A Knicks deal allows Anthony, now 30, to lock in a high paycheck for five years, one more than he’d been offered in either L.A. and Chicago. He might not command nearly as much as a 34-year-old free agent as he does now, so staying with the Knicks offers financial security. The lesson for the rest of us? If you’re at the peak of your career – for most people that’s in their 40s and 50s – this is the time when you have the highest earning power. If you’re valued at your firm, trading stability for a new job where you need to establish yourself is a risk. “When you’re the new guy, you may be more vulnerable if rocky times hit,” says Haefner.

What does a new job mean for your family?

Family was definitely a factor for LeBron. He told Sports Illustrated that returning to his hometown was always his intention: “I have two boys and my wife, Savannah, is pregnant with a girl. I started thinking about what it would be like to raise my family in my hometown. I looked at other teams, but I wasn’t going to leave Miami for anywhere except Cleveland. The more time passed, the more it felt right.”

Anthony publicly said his decision also hinged on how it would affect his family. Beyond his wife’s opportunities in Hollywood, the Anthonys have many ties to New York. La La Anthony grew up in New York and Anthony spent his early years there before moving to Baltimore. Moving their seven-year-old son Kiyan to a new city would have been another challenge. In an interview with VICE Sports, Anthony said

“My son goes to school and loves it here (in New York). To take him out and take him somewhere else, he would have to learn that system all over again. I know how hard that was for me when I moved from New York to Baltimore at a young age, having to work your way to try to make new friends and fit in and figure out the culture in that area.”

Talk about what relocating would mean for your family. Will your spouse be able to get a comparable job? If you have children, what are the schools like? How will the kids feel leaving friends behind? Is the lifestyle a good fit for everyone? How far will you be from your extended family?

Relocating will have a major impact on your professional and personal life. The more factors you weigh, the better the decision you can make, whether or not you make a multi-million dollar salary.

 

TIME Transportation

This Map Shows Where Gas is Taxed the Most

A map of gasoline tax in the US. American Petroleum Institute

Drivers in New York pay nearly 69 cents per gallon in taxes

New York drivers pay more in gas taxes than those in any other state, according to a new map from the American Petroleum Institute, a gas industry group. Empire State drivers pay nearly 69 cents in state and federal taxes for every gallon they buy, more than twice as much as Alaska, the state with the lowest rate.

Much like other taxes, gas tax rates vary dramatically from state to state. The federal tax is 18 cents (diesel is closer to 24 cents). In fifteen states the total tax is more than 50 cents per gallon, making it the approximate national average. The tax bottoms out in fuel-rich Alaska at less than 31 cents per gallon.

The federal portion of the gas tax goes into the Highway Trust Fund, where it’s used to build and maintain roads. But the fund has been dwindling as people drive less and cars become more fuel efficient. The Obama Administration has warned that the fund’s balance will be at zero by the end of August.

(Read More: The One Credit Card You Need to Ease Pain at the Pump)

MONEY Taxes

Potato Salad Kickstarter Guy May Have to Swallow $21,000 Tax Bill

potato salad
Let them eat... potato salad? Denise Bush—Getty Images

Perhaps you’ve heard about the Kickstarter campaign to raise funds to make some potato salad. It started as an attempt at irony but has now raised more than 70,000-completely-serious-dollars — inspiring awe, anger, less-successful copycats and plenty of jokes.

For those wondering where all that money will go, the Tax Foundation has an (at least partial) answer: The taxman.

According to the think tank’s calculations, project founder Zack Danger Brown should owe federal taxes of $8,632, Columbus city taxes of $1,510, Ohio state taxes of $1,712, plus $9,313 in payroll taxes. That all adds up to a whopping $21,167 — and that assumes donations stop after $70,000. (Spoiler alert, the total figure has already jumped $1,000 in the last couple of hours.)

The reason for this big bill is that funds raised on Kickstarter are considered income and can generally be offset only by expenses directly related to the project.

So unless Brown is adorning his potato salad with Wagyu beef, white truffles, and gold leaf, he could be looking at a 32% effective tax rate.

If he does as many are suggesting and donates any leftover cash to charity, he might be able to offset some of that with a charitable contribution deduction — though the Tax Foundation says he’ll still be liable for payroll taxes.

MONEY Ask the Expert

Do I Owe Taxes on a Windfall from a Retirement Plan?

140605_AskExpert_illo
Robert A. Di Ieso, Jr.

Q: I am the beneficiary of a $15,800 death benefit from my dad’s pension plan. I was under the assumption that I would not be taxed on it, but is that the case? I want to make sure I deduct any taxes before I distribute the money to my siblings. —Tanya, White Plains, N.Y.

A: The answer depends on the source of the death benefit. If the payout is in the form of a life insurance policy—what your case sounds like—you won’t owe any taxes on the $15,800.

But the tax consequences would be different if you had inherited a tax-deferred retirement plan, such as a 401(k), says Charlotte, N.C. financial planner Cheryl J. Sherrard. The money in that kind of plan is taxed only when the owner makes a withdrawal. As an heir, you would owe income taxes on any distributions.

When you inherit a retirement account, you have few payout options. You can take the full amount in a lump sum, which could push you into a higher tax bracket if the windfall is significant. If you do that, you can request federal and state tax withholding when you fill out the distribution paperwork. Or you can ask for the full amount and pay the taxes later.

To spread the distributions over several years, you can open what’s called an inherited IRA and then move the retirement plan assets into this new account (assuming the qualified retirement plan allows you to). You generally have to start taking annual distributions no later than Dec. 31 following the year of the original account holder’s death. Since the rules are tricky, talk to a tax professional, advises Sherrard.

In this case you would either be gifting a small amount to your siblings yearly, or the full amount all at once. But keep in mind that as a sole beneficiary you are not required to give any money to them.

And no matter what, don’t rush to share your inheritance until you have the full picture of what your father left behind.

“You may want to wait until any other assets of your father’s have been split among all siblings, and then if you desire to equalize with them, you can do so via that net retirement money,” says Sherrard. “This is a common gotcha when one child inherits a taxable asset and then needs to take taxes into consideration before splitting it up.”

Have a question about your finances? Send it to asktheexpert@moneymail.com.

 

MONEY Ask the Expert

How Do I Find the Best Place to Retire?

140605_AskExpert_illo
Robert A. Di Ieso, Jr.

Q: I live in New Jersey. Which state would be financially better to retire to: Pennsylvania or North Carolina? – Kevin, Bridgewater, NJ

A: Your cost of living in retirement can make or break your quality of life, so it’s smart to take financial factors into account as you decide where to live. Moving from New Jersey where taxes are steep and home prices are high to a more affordable area will allow your savings to stretch further. Housing and property taxes are the biggest expenses for older Americans, according to the Employee Benefit Research Institute.

By those measures, North Carolina and Pennsylvania both stack up fairly well. Neither state taxes Social Security benefits or has an estate tax, though Pennsylvania has an inheritance tax and North Carolina will begin taxing pension income for the 2014 tax year. When it comes to cost of living, Pennsylvania has a slight edge. The median price of homes in Pennsylvania is $179,000 vs. $199,000 for North Carolina, according to Zillow. Income tax is a flat 3.07% in Pennsylvania while North Carolina has a 5.8% income tax rate. You can find more details on taxes in each state at the Tax Foundation and CCH. But both states have cities—Raleigh and Pittsburgh—that landed at the top of MONEY’s most recent Best Places to Retire list.

Of course, you need to look beyond taxes and home prices when choosing a place to live in retirement, says Miami financial planner Ellen Siegel. Does your dream locale have high quality, accessible healthcare or will you have to travel far to find good doctors? Will you be near a transportation hub or will you live in a rural area that’s expensive to fly out of when you want to visit family and friends?

There are lifestyle considerations, too. If you like to spend time outside, will the climate allow you enjoy those outdoor activities most of the year? If you favor rich cultural offerings and good restaurants nearby, what will you find? Small towns tend to be less expensive but may not offer a vibrant arts scene or many dining options.

To determine whether a place is really a good fit for your retirement, you need to spend more than a few vacation days there. So practice retirement by visiting at different times of the year for longer periods. Stay in a neighborhood area where you want to live and get to know area residents. “Having a strong social network is important as you get older and if you move to a new area, you want to make sure you can make meaningful connections and find fulfilling activities,” says Siegel. By test driving your retirement locations before you move, you”ll have a better shot at getting it right.

Have a question about your finances? Send it to asktheexpert@moneymail.com.

MONEY Taxes

The Moves to Make Now So You Can Cut Taxes Later

A financial adviser explains that to maximize income, you need the right kinds of investment accounts, not just the right investments.

In my work with financial planning clients, I can see that people understand the merits of having a diversified mix of securities in an investment portfolio. Investment advisers have done a good job of explaining how diversification can improve clients’ risk-adjusted returns.

What can be a little harder for advisers to explain and clients to understand, though, is the value of “tax diversification” — having investments in a mix of accounts with different tax treatments. By having some securities in taxable accounts, others in tax-deferred accounts, and still others in tax-free accounts, people can maintain the flexibility that makes it easier to minimize their taxes in retirement.

The benefits of traditional tax-deferred retirement accounts, such as IRAs and 401(k)s, are easy for participants to see. Contributions reduce people’s current tax bills. And the benefits continue to compound over the course of the investors’ careers, since none of the income is taxable until withdrawals are made.

Yet what clients don’t often grasp is the price they’ll wind up paying for this tax benefit later in life. Distributions from tax-deferred accounts are treated as ordinary income. It can be more expensive to spend money from a traditional IRA than from a taxable account, since dividends and long-term capital gains in taxable accounts are taxed at more favorable rates. And IRS-mandated required minimum distributions from traditional retirement accounts can force a retiree to generate taxable income at times when he or she wouldn’t want to.

So how do you get clients to understand that traditional IRAs and 401(k)s may cost them more than they think? Sometimes it’s a matter of being blunt — saying that the $1 million they see on their account statement isn’t worth $1 million; they may only have $700,000 or less to spend after paying taxes.

Once clients understand that, they also understand the appeal of Roth IRA and Roth 401(k) accounts, since current income and qualified distributions are never taxable. Another advantage: The IRS also does not require distributions from Roth IRAs the way it does for traditional retirement accounts. For many high income taxpayers, $700,000 in a Roth IRA is more valuable than $1 million in a traditional IRA.

But Roth IRAs and 401(k)s aren’t perfect and shouldn’t be a client’s only savings vehicle either. Participants don’t receive any upfront tax benefit. And it’s conceivable that future legislation may decrease or eliminate the benefits of Roth accounts. If the U.S. or certain states shift to a consumption-based tax system, for example, a Roth IRA will have been a poor choice compared to a traditional IRA.

And it’s useful to have money in taxable accounts, too. People need to have enough in these accounts to meet their pre-retirement spending needs. In addition, holding some stock investments in taxable accounts allows people to take advantage of a market downturn by realizing capital losses and securing a tax benefit. You can’t do this with a retirement account.

Given that each type of investment account has advantages and disadvantages, advisers should encourage all their clients to keep at least some assets in each retirement bucket. That way, retirees have the flexibility to choose the source of their spending based on the tax consequences in a particular year.

In a low-income year, retirees may want to pull some money from their traditional IRAs to benefit from that year’s low tax bracket. Depending on the retiree’s income level, some traditional IRA distributions could escape either federal or state income tax entirely. In a high-income year, when investments in a taxable account have a lot of appreciation, it may make sense for the retiree to spend from a Roth account instead.

Since we don’t know what a client’s tax situation will look like each year in the future, diversification of account types is just as prudent as investment diversification.

—————————————-

Benjamin Sullivan is a manager at Palisades Hudson Financial Group, where he helps the firm’s high-net-worth clients with their personal financial planning, investment and tax planning needs. He is a certified financial planner certificant, an IRS enrolled agent, and a member of the New York chapter of the Financial Planning Association.

MONEY Taxes

WATCH: One Year After DOMA Ruling, What’s Changed For Same-Sex Couples?

One year after the Supreme Court struck down parts of the Defense of Marriage Act, same-sex couples are still fighting for marriage equality.

Your browser, Internet Explorer 8 or below, is out of date. It has known security flaws and may not display all features of this and other websites.

Learn how to update your browser