Did you know that 9 states don’t tax income? If you live in one of those states, you could be putting more money in your pocket by not having to pay income taxes. Everybody wants a lower tax bill. One way to accomplish that might be to live in a state with no income tax.
At present, nine states (Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming) levy no state income tax.
Table of contents
- What is income tax?
- How does it Work?
- What does it mean to live in a state with no income tax?
- What are the pros and cons of living in a state with no income tax?
- 9 States With No Income Tax
- 2. Alaska
What is income tax?
The name “income tax” describes a widely accepted system in which the government levies taxes on businesses and individuals regularly.
The money that the government collects is then used to fund essential public services.
Income taxes are most commonly paid in the forms of fixed payments, but it can also pay them as a percentage of one’s income or profits.
When business owners pay their income taxes, the state then uses them for community development projects or infrastructure improvements.
See Also: How Much you Have to Earn to File Taxes in 2023
How does it Work?
If you’re reading this, you should report your income tax. The IRS collects taxes on all forms of income, such as wages, salaries, commissions, investments, and business earnings.
The government uses the personal income tax they collect to help fund road infrastructure, schools, and Social Security.
What does it mean to live in a state with no income tax?
A state with no income tax might seem like a dream come true. No more fighting with the government to get your money back!
Instead, you have the extra money in your pocket every time you get paid — or can save it to spend later.
But you’ll still be expected to pay other taxes to keep that extra cash.
If your income meets the qualifications for filing a federal tax return, you’ll still be expected to do so by the tax-filing deadline.
What are the pros and cons of living in a state with no income tax?
Depending on where you live, most people can expect to pay at least some income tax during retirement.
Those in states without an income tax might get to avoid paying a state income tax on their 401(k) distributions and pensions which can mean more money for your golden years.
Avoiding additional taxes can be a nice retirement perk. Still, you might also consider how far away from friends and family you want to move along with other important financial considerations.
For example, some states have fewer options for public transportation, less affordable health care, higher property taxes, or minimal funding for senior care programs.
Millionaires don’t worry about taxes. Learn How To Retire At 50 As A Millionaire! Retirement Dreams
You might consider checking to see if your home state is one of the nine without income tax.
If so, you can maximize your state and local tax deductions because there won’t be any state income taxes to add back. That’s also true if you live in a community where property taxes are meager.
Consider this aspect of your decision before moving, as it could add up over the long run!
Several conditions need to be met to reap the benefits of living in an income tax-free state.
Establishing a domicile, or the intention of making a state your permanent home, is critical. Rules and requirements vary from state to state.
The best way to avoid having to pay state income taxes is to establish a domicile in an income-tax-free state. Find a great financial advisor in your area to help you plan your tax future wisely.
Cost and quality of living
Your cost of living includes tallying up the costs of housing (rental or purchase), food, wages, health care, and lifestyle.
The savings you gain on state taxes might not be worth the extra cost to live comfortably in another state.
For example, someone currently residing in Buffalo, New York, on a $55,000 salary would need to earn over $70,000 to maintain their standard of living in Anchorage, Alaska.
9 States With No Income Tax
Nevada relies heavily on high sales taxes on everything from food to clothes, gambling, and casino hotel taxes.
It ranks 8th for the total income tax rate with an 8.23% personal income tax burden and 22nd out of 50 for the overall tax burden when compared to the other states.
Despite the high cost of living, Nevada ranked 37th for quality of life (compared to all 50 states), and its infrastructure received a grade of ‘C’ and 22nd out of 50 from the ASCE in 2018. Nevada’s taxes are no match for its low cost of living and housing prices.
Nevada is a solid choice if you’re looking to relocate and re-establish your business in a business-friendly, affordable state.
See Also: What is Net Investment Income tax? Overview and How it works
Alaska’s capital is Juneau and it is the second-largest state behind Maine. The state has no income tax on revenue. The mean effective property tax rate is 0.98%.
The state’s overall state and the local tax burden is 5.8%, the lowest in the nation. It also earns a low affordability rank from U.S. News & World Report at number 47 of 50, which is the fourth-lowest ranking state in the country.
The annual stipend — which can help offset costs — offered to residents is $2,000 with citizens receiving this perk once a year after meeting specific rules and qualifications based on the date of residency in annual or
quarterly lottery drawings.
Florida is a beautiful snowbird state with warm temperatures and a large population of retirees.1415 Sales and excise taxes in Florida are above the national average, but the overall tax burden is just 6.97%—one of the lowest in the country.
Florida ranks 31st in affordability due to its higher-than-average housing costs.
Still, Florida came in at 10 on the U.S. News & World Report “Best States to Live In” list for 2019. When deciding on the best state for retirees, you’ll have to consider your budget and future income.
While the cost of living might not be a deal-breaker for most people, Floridians may still have to contend with a competitive housing market and prices.
U.S. News & World Report ranks the state at 41 out of 50 for housing affordability.
4. New Hampshire
New Hampshire’s overall state and the local tax burden is 9.7% (Tax Foundation). It’s only 5% for investment income (the phaseout started in 2016), and the state doesn’t have a sales tax (but it has one of the highest excise taxes for tobacco!).
The cost of living is high for property taxes but low for everything else. Did you know that New Hampshire has one of the lowest combined state and local tax burdens in the country?
And according to the Tax Foundation, it’s ranked number two for business friendliness. That’s quite an honor.
New Hampshire is also a great place if you want to live in a community with a low cost of living, but property taxes still aren’t low enough if you ask me. And then there are the property taxes.
5. South Dakota
Retirees looking for affordable living will want to check out South Dakota. Located in the heart of the country, Mount Rushmore and Badlands National Park are popular destinations.
The state ranks far above average on affordability, which means retirees won’t have a struggle on their hands when it comes to maintaining their standard of living. South Dakota’s sales and excise taxes are slightly higher than average.
Overall, South Dakota’s taxes are lower than most states, but homeowners might not like its effective property tax rate of 1.14%.
Texas is the second-largest state in the U.S. and it’s widely known for its “go big or go home” attitude.
The overall state and local tax burden is 8%, making it one of the lowest in the country, but the effective mean property tax rate, at 1.6%, is the sixth-highest in the nation.
However, living in Texas has its perks outside of taxes: U.S. News & World Report ranks the state as a solid 22 out of 50 for its overall affordability and 14 out of 50 for the cost of living.
Texas relies on sales and excise taxes to foot the bill. In some jurisdictions, sales tax can be as high as 8.25%.
Property taxes are also higher than in most states, the net result of which is an overall tax burden of 8.19% of personal income.
Washington boasts no income tax, a fact that may be appealing to large corporations who call the state home.
The Evergreen State also doesn’t impose a corporate income tax, which drives down the overall sales and local tax burden for residents.
Washington takes the 44th spot on U.S. News & World Report’s affordability scale, due to high housing costs.3133 Young people make up a large portion of Washington’s population, given that it has one of the lowest percentages of senior citizens at 15.9%.
Residents will enjoy low overall taxes with major employers who don’t pay corporate income tax calling Washington home.
Washington residents do pay high sales and excise taxes; however, they can benefit from lower premiums because they have less to spend on gas than most Americans since gas is more expensive in Washington than in most other states.
Wyoming is a good place to start a business. There’s no income tax and the state has a low sales and local tax burden. You can get an overall affordability rank of 33 out of 50 from the U.S. News & World Report.
The least populated state in the U.S., Wyoming is full of a peaceful, rural way of life. The total population for Wyoming is 576,851 residents.
Tennessee has abolished its Income Tax; however, they do tax goods. The state’s overall taxation amount is 7% and ranks second-lowest in the country.
Tennessee’s effective property tax is 0.63% and it is best able to be described
It’s not something most people want to spend a lot of time doing but, you could potentially save thousands of dollars by figuring out whether a move is worth it by comparing your income tax rate both before moving and in the new state, as well as property & sales taxes.
See Also: 10 Ways On How To Pay Fewer Taxes In 2023 | Insider Secret
Leave a Reply
You must be logged in to post a comment.