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Moving??? Calculating the cost of living adjustment

April 21st, 2010 2 comments

When moving to a new city, state, or country, it’s pretty important to understand what you should expect as a salary.  For example, I might be a high roller here in Orlando making $50k but take that salary to Manhattan, and I’m gonna be slummin’ it.  I think some meals might even cost more than $50k up there.

The first thing to take a look at would be the cost of living adjustment itself.  I found an online calculator here that’s pretty good.  According to it, someone making $50k in Orlando needs to earn $110k in Manhattan, just to keep their living standards.  That’s crazy!  Though it looks like housing is the biggest factor, because you would have to spend 357% more on housing there than in Orlando.

The next thing would be the tax difference.  In Florida, there’s no State income tax, but you can bet most places will.  According to Wikipedia, 7 states do not have a state income tax, and 2 others only tax dividends and interest income.  It’s no wonder all the old people migrate to these states.

Anyways, how would you calculate the adjustment?  Lets say you make $50k in Florida with no income tax and are moving to North Carolina, where income tax is approximately 7%.  Would you just multiply $50k by .07 to see how much extra you need?

$50,000 X .07 = $3,500

So you would need to make $53,500?  Not so fast.  Let’s say you made $53,500 and you had 7% withheld for state income tax.

$53,500 X .07 = $3,745

Something doesn’t add up quite right…

In reality you need to take the current tax free income $50,000 and divide it by 1 minus the tax rate, or (1 – .07) = .93… So:

$50,000/.93 = $53,763

AND

$53,763 X .07 = $3,763

There we have it… So summing up:

(TAX FREE INCOME) / (1 – TAX RATE) = (EQUIVALENT TAXED INCOME)

Then take that and multiply it by the cost of living adjustment to get your total income requirement to keep your same income in a different State.

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