April 1, 2020
Despite the postponement of the deadline this year, April is still tax season for us! Oh, how much I dread this part of the year! And it’s not even the paperwork! If I could do twice the paperwork to cut my taxes in half, I’d gladly do so. So, certainly, for me, the problem is not the filing of my taxes! The discomfort of tax season is 100% due to paying income taxes. Sure, we moved to Washington State to eliminate the state income tax – a big plus compared to California – but that still leaves that pesky federal tax. Last year, we still ended up in the 22% federal tax bracket for ordinary income and 15% for long-term capital gains and qualified dividends. I still don’t the final, final tally yet but it looks like our total federal tax bill will be about $23,000. That hurts! And it hurts more having to pay taxes for the blockbuster year 2019, right around the time the market is melting down this year!
So we developed the ultimate tax hack! Move to a location without any(!!!) income taxes! At all! That location is Monaco, a tiny sovereign nation on the Mediterranean coast surrounded by Southern France. It has no income tax, no capital gains tax and no property tax, how awesome is that?
We did a reconnaissance visit to the Cote d’Azur last year, including Monaco, and we absolutely fell in love with the place! I mean, where else in the world can you watch a Formula One race looking out of your apartment window?
It’s sunny and warm year-round and the food and wine are outstanding.
Let’s look at the numbers in more detail…
The tax arbitrage doesn’t come cheap, though. But I did look at the numbers and it’s looking really good. Our home here in Washington will be on the market soon for $375,000 and we plan to spend about $2,200,000 for a nice condo in a quiet street in Monte Carlo. That’s quite a large difference ($1,825,000) but we’re going to make that back in no time. At $23,000 tax savings a year it will take only just under 8 years. That’s not so bad!
Oh, wait a second did I get that right? OK, let me get the calculator again: 1,825,000/23,000=79.3 years. Uuhhhmmm, I think I messed that up. I’m off by a factor of ten. Whhaaatttt? I’ll be over 120 years old when we recover the extra housing cost!
What is going on here? What is this? An April Fools joke? Wait, it is April 1 today. Ahhh, that explains it.
Change of plans!
Oh, well, it looks like we’re not moving to Monaco after all. If we ever add one or two more zeros to our net worth we might reconsider a move to the place of the rich and famous. Until then, we wouldn’t fit in so well in Monaco anyway. They seemed a bit snobbish there. If you’re not driving at least a Rolls Royce they’d think you’re just the riff-raff from Nice.
And you want to know another reason I couldn’t live there? I always hated Monte Carlo simulations! 🙂
Moreover, Southern Washington State is actually quite beautiful!
The lesson here is that tax optimization is nice but don’t put the cart before the horse. Taxes can be really low in retirement as I pointed out in a post last year. Ours will be low as well eventually. Most retirees should first get their safe withdrawal math in order, and then the tax situation is likely just an afterthought unless you’re planning a really, really large retirement budget.