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Hidden Costs of Living in a High Cost of Living Area

Cost Of Living Expenses Sky High Monitor Showing Increasing Costs
It’s pretty obvious that living in a high cost of living area is expensive. I live in New York City and when I hear about how much a house costs in many other cities, I am pretty envious. My friend, who lives in upstate New York, rents an entire house for $900 splitting the costs with a few roommates. A 500 square foot studio apartment in my neighborhood costs about $1300 and I don’t live in Manhattan or a hip part of Brooklyn. Housing costs are usually the biggest expense but things such as food, entertainment, childcare, and others costs are also higher. Here are two hidden costs of living in a high cost of living area that you may not have thought of.

Taxes

Yes, higher cost of living areas often have higher taxes too. If you live in New York City, you pay a state income tax as well as a city income tax. But I’m not talking about that. There is another tax consequence that you may not realize when you live in a high cost of living area. When you file your taxes, there are credits and deductions for various things such as student loan interest and for having children, however, these credits and deductions phase out and are completely eliminated at certain incomes. Presumably, the reason for the benefit of the tax credit or deduction being cutoff at a certain income limit is because that person makes enough money and the benefit is intended for those making less. This makes sense but when you live in a high cost of living area and your basic living expenses are much higher, you might be cut off from taking advantage of these tax benefits even though you may not be as well off financially as your counterparts living in lower cost of living areas.

Let’s take for an example the student loan tax deduction. The deduction does not take into account where you live nor does it take into account the amount of student loan debt you have. If you live in New York City and have a modified adjusted gross income (MAGI) of over $65,000, the deduction starts to phase out and with a MAGI of $80,000, you will get no deduction. So a person with a MAGI of $80,000 living in NYC with $100,000 in student loan debt will get no benefit from the student loan tax deduction, while someone in let’s say Memphis, Tennessee who makes $63,000 and has $30,000 in student loan debt will get a tax deduction. According to the cost of living calculator on Nerdwallet, you would only need to make $44,798 in Memphis to maintain the same standard of living as someone making $80,000 in New York City. (Note: I input Queens, New York when using the calculator. If I used Manhattan where the cost of living is even higher, someone living in Memphis would only have to earn $30,260 to maintain the same standard of living as someone earning $80,000 in Manhattan.) Check out this site for more information about the student loan deduction as well as the calculator to figure out your tax benefit if you qualify.

The same situation applies to a family with a child who may benefit from the child tax credit. The tax credit starts phasing out for a family with a MAGI of $110,000 and at an MAGI of $140,000 there is no more benefit. A family living in NYC will likely have higher housing costs as well as child care costs. There are a multitude of tax benefits that phase out as your income rises such as the earned income credit and saver’s credit. You also can no longer contribute to a ROTH IRA if you reach a certain income level.

Financial Aid for College

When your child is ready for college and you fill out the financial aid application, your income will be a big factor in the amount of financial aid your child will receive. However, living in a high cost of living area really isn’t taken into account in the determination. According to Edvisor, “generally, every $10,000 increase in parent income will cause about a $3,000 decrease in need-based financial aid.” So in the example above where you could have a similar standard of living making $40,000 less, you would be expected to pay about $12,000 more for college if you live in the higher cost of living area even though the two families may have the same amount of disposable income.

While I understand that where you live is a choice and that higher cost of living areas often have more and better paid job opportunities, I wanted to point out the costs of living in these areas other than the obvious ones. It just cannot be disputed that living in a high cost of living area will affect one’s disposable income, yet this is not taken into account when filing taxes or filing for college financial aid. What are other hidden costs of living in a high cost of living area? Do you think it’s fair that the cost of living is not taken into account?

Is a Family Trust Right for You?

The following is a guest post from Andrew Martin. Also check out his guest post from last week entitled, Should Everyone Make Out a Will?

If you have amassed a sizable amount of property and assets during your life, you will want to take the necessary steps to ensure everything is passed along to your loved ones according to your wishes. There are several ways to accomplish this, and the right option for you will depend on your unique financial circumstances. One option that you may want to consider is a family trust.

A family trust, also called a revocable living trust, is a legal document that establishes a protocol for how your assets will be handled once you become incapacitated or die. This option is particularly advantageous for wealthy individuals since it allows you to protect your assets and reduce the tax liabilities of your beneficiaries.

How Does a Family Trust Work?

When you create a family trust, you will appoint an individual to serve as the trustee. The trustee will take control over the assets in your trust at the time of your death or if you become incapacitated and can no longer manage them yourself. Make sure you choose someone who is both trustworthy and capable of handling this important responsibility. Your estate planning attorney can help ensure your family trust clearly spells out the responsibilities of the trustee and provides for a smooth transition of your assets to your heirs.

It is important to understand that your trustee cannot do whatever he or she wants with the assets in your family trust. The trustee must follow the guidelines you have set up in the terms of your trust.

Once your family trust has been created, you can move any of your assets and property in and out of it as you wish. Transferring your assets into a family trust is a fairly straightforward process, and your estate planning attorney can help ensure it is completed properly. Since the trust is revocable, you maintain full control of all the assets in the trust until the point that you become unable to do so due to disability or death.

Who Should Consider a Family Trust?

A family trust may be an ideal estate planning option if you:

  • Have young children and need to ensure their inheritance will be handled properly and responsibly until they are old enough to manage it for themselves
  • Have children from a prior marriage and want to protect their inheritance from going to your current spouse in the event of a divorce
  • Would like to minimize the estate taxes imposed on your estate when you die
  • Would like to protect your loved ones’ inheritance from the risk of being seized by creditors, during bankruptcy proceedings, or in a lawsuit
  • Own property in multiple states and would like to avoid the time, hassle, and cost of multiple probate (the legal process that happens after death) proceedings after you die

Benefits of a Family Trust

There are many benefits to placing your assets in a family trust. It can:

  • Help you avoid probate after you die
  • Allow you to maintain control of your assets throughout your life so that you can use them as you like
  • Prevent the courts from controlling your assets if you become incapacitated
  • Allow you to change the beneficiaries of your assets at any time
  • Reduce your estate tax liability
  • Set up health powers of attorney and make your healthcare wishes clear in the event that you become incapacitated
  • Provide legal protection of your assets, ensuring they pass to your beneficiaries according to your wishes
  • Significantly reduce the amount of time it takes to settle your estate after you die

    • Tax Benefits of a Family Trust

    When set up properly, there are significant tax benefits associated with a family trust. You can substantially reduce or potentially avoid entirely the estate taxes imposed on inherited property. If you have a very large estate, this can potentially save your loved ones hundreds of thousands of dollars.

    It is important to understand that estate tax laws change periodically. In order to ensure your family trust is set up in a manner that maximizes these tax benefits, you will need to work with an estate planning attorney who is current on the federal tax regulations governing these trusts.

    Choosing a Trustee

    If you decide to create a family trust, you should put a lot of thought into who you choose as your trustee. This person should be someone you completely trust. In addition, this person should be fairly savvy regarding financial matters. This is extremely important since the trustee will be responsible for investing your assets as stated in your trust.

    In most instances, you will want to choose a close family member. This is commonly a spouse or a child. However, if you feel a different person such as a sibling or a close friend would be more qualified to handle these important functions, then choose the most qualified person.

    If you don’t have a family member or close friend whom you trust to perform this job, then you may want to consider appointing a professional trustee. However, this should be a last resort since professional trustees will need to be paid for their services and in many instances, this will give them an incentive to drag out the proceedings.

    —

    Bio:

    Andrew Martin is a professional writer with over five years of experience writing legal copy. He is also a musician and regular contributor to the Marquee Magazine, an online and print publication covering music in the Boulder and Denver area.

    Tax Shelters for You and Me

    credit: freedigitalphotos.net by Stuart Miles

    credit: freedigitalphotos.net by Stuart Miles


    Last year, when the media reported that General Electric paid no corporate income taxes people were furious. During the last presidential election, there were accusations that Mitt Romney had paid no income tax for a decade. Whenever we read about tax shelters, we think of the wealthy one percenters stashing their cash in the Cayman Islands or using some complicated loophole to avoid paying taxes to Uncle Sam. But how about tax shelters for us regular Joes. Here are a few ways you can reduce the amount of taxes you have to pay.

    Tax Deferred Retirement Plans (401k, 403b,457, etc)
    Many people have access to a tax deferred retirement plan such as a 401K through their employer. Employer provided matching funds are not the only benefit of these plans though, there is also a tax benefit. If you participate in your traditional 401k, you can save up to $17,500 per year (2013 and 2014) in tax-deferred contributions ($23,000 if you are over 50 years old). Every dollar you contribute reduces your taxable wages, thereby lowering your taxes. Some employers offer a Roth 401k in which case, your taxes are not lowered, however, all the money in the account grows tax-free and you will not need to pay taxes on it when you withdraw from the account. With the Traditional 401k account, you lower your taxes presently, but may have to pay income tax when you withdraw from the account.

    Individual Retirement Plans
    If you do not have access to a 401k plan, or even if you do but prefer to invest on your own, you can open an IRA. Much like the 401K plans, you can reduce your taxable income by contributing money to a traditional IRA. If you prefer, you can open a Roth IRA account which will not lower your taxes, but will allow the money you invest to grow tax-free. The maximum contribution is $5,500 for 2013 and 2014. To learn more about IRAs and the income limits that apply, click here.

    Note: If you don’t already have enough incentive to save for retirement, there is a tax credit up to $2,000 just for saving for retirement. Income limits apply. Check out this link on the IRS website for more details and to see if you qualify.

    Flex spending account

    Health Care
    The Health Care Spending Account is an employee benefit that some employers provide which helps pay for health-related expenses with tax-free dollars. This includes medical, hospital, laboratory, prescription drug, dental, vision, and hearing expenses that are not reimbursed by your insurance or other benefit plans. The maximum contribution for 2014 is $2,500. The open enrollment deadline is right around this time in November so check if you have this benefit and take advantage of it. A lot of people don’t take advantage of this plan probably because they don’t know about it, are too lazy to submit receipts or they are scared about the “use it or lose it” aspect of it. If you have a good estimate of the medical expenses you will be spending during the upcoming year, the flex spending plan is a great deal. If by the end of the year you still have money to spend, you can buy various medical supplies that qualify such as contact solution and bandages. Drugstore.com has an entire section under the FSA tab which sells items that qualify.

    Note: Health Savings Plans (HSA) which are different from the health care flex spending account is also a great way to reduce your taxes. It is not “use it or lose it” so you can leave money in your account. I’m not that familiar with this type of plan so I won’t get into it. However, you can read this Forbes article if you are interested in learning more about it.


    Dependent care
    For those of you with kids, the dependent care account will take some of the bite out of paying for daycare which is pretty pricy. Other expenses that are eligible for this account include babysitters (allowing you to work), nannies, summer camp, and possibly for elder care as well. You can contribute up to $5,000 in your dependent care flex spending account. For more information about eligibility and qualified expenses, click on this link.

    Tax free commuter benefits
    If your employer offers this benefit, it allows you to save a good amount of money on your commute to work. Commuters can use pre-tax dollars to pay for the subway, bus, train, ferry, car, or vanpool. To see how much money you can save, use this calculator.

    If you are interested in reading about how real families drastically reduced their tax bill check out the following posts:
    How a Family of Four with a $100,000 yearly Income Pay Only $6400 in Federal Income Tax by Brad from Richmond Savers
    Six Figure Income Pay No Tax by Justin from Root of Good.

    I am not a tax expert so please consult a tax professional or do your own research before making any decisions.

    Do you take advantage of any of the above to reduce your taxable income?