Living in a state with no earnings tax is one technique for reducing your general tax burden.
As of 2021, eight states — Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington and Wyoming — don’t levy a state earnings tax. A ninth state, New Hampshire, doesn’t tax earned earnings, but it surely does impose a 5% tax on dividends and curiosity. This is ready to run out in 2027.
Here’s a breakdown of what it means to stay in an income-tax-free state, what advantages you would possibly get pleasure from and what drawbacks you possibly can anticipate. Plus, see a fast head-to-head evaluation of how these 9 states with no earnings tax match up concerning different taxes and residing prices.
What does it imply to stay in a state with no earnings tax?
At essentially the most primary degree, residing in a state with no private earnings tax signifies that you’ll get to maintain a bit of bit extra of your paycheck. And should you’re at the moment residing in a state with excessive private earnings tax charges like California (the place some individuals would possibly see parts of their earnings taxed at 13.3%), it may appear tempting to pack your baggage and ebook a one-way ticket to Washington. However, transferring to a state with out an earnings tax doesn’t imply that you can be excused from paying different taxes. If you meet the earnings {qualifications} for submitting a federal return, you’ll nonetheless be anticipated to take action by the tax-filing deadline.
Considerations of residing in a state with no earnings tax
Retirement advantages
Most individuals can anticipate to pay a minimum of some taxes throughout retirement — whether or not on 401(okay) distributions, pensions or Social Security advantages. However, residents of states with out private earnings tax usually get to skip paying state taxes on retirement plans, which might imply more cash to your golden years.
Avoiding further taxes could be a good retirement perk, however ensure you weigh the tax advantages of transferring towards different necessary monetary (and private) concerns. For instance, some states have fewer choices for public transportation, much less inexpensive well being care, larger property taxes or minimal funding for senior care applications. You may additionally not want to stay far-off from pals or shut household.
Other taxes
State taxes are sometimes used to generate income for companies resembling well being care or to fund infrastructure. Without this income stream, some states find yourself relying extra closely on different taxes, resembling property or gross sales, to recoup the loss. So should you’re a house owner who at the moment lives in a state with comparatively inexpensive property taxes, it is probably not price giving that up. And, importantly, residing in a state with no earnings tax additionally means you may not be capable of take full benefit of the state and native tax deduction should you itemize in your federal return.
On the plus aspect, apart from New Hampshire, residing in an income-tax-free state does imply that any capital positive aspects you earn are shielded from state taxes. This signifies that you’ll be liable just for any capital positive aspects on the federal degree, that are taxed primarily based on how lengthy you held the asset earlier than promoting it.
Establishing domicile
Several situations have to be met to reap the advantages of residing in an income-tax-free state. Establishing domicile, or the intention of creating a state your everlasting house, is essentially the most essential one. Rules and necessities range from state to state, however usually, you could stay in a spot for a minimum of half of the 12 months, 183 days, to start qualifying as a everlasting resident. In addition, states conduct residency audits, so this may require proof.
Tread rigorously right here. People who stay in a single location (say, New York) however spend a great a part of the 12 months in one other state (say, North Carolina) may very well be thought of a everlasting resident of 1 state and a “statutory resident” of the opposite for tax functions. This means they might find yourself paying taxes on earned earnings in each states. Tax planning with knowledgeable is among the greatest methods to keep away from discovering your self in a sticky tax scenario.
Cost (and high quality) of residing
Perhaps essentially the most essential quantity to crunch is your price of residing. This consists of tallying up the prices of housing (rental or buy), meals, wages, well being care and life-style. The financial savings you achieve on state taxes may not be price the additional price incurred to stay comfortably in one other state. For instance, somebody at the moment residing in Buffalo, New York, on a $55,000 wage would want to earn over $70,000 to keep up their way of life in Anchorage, Alaska.* That’s an additional $15,000 you’ll should earn to account for larger housing, meals, transportation, and well being care prices.
Think about your job as effectively. Remote work is increasing, making it simpler than ever to examine transferring with out risking job safety. But should you have been to stay in a state with restricted alternatives in your specific trade and one thing disrupted your employment, you possibly can face difficulties securing one other job.
*This hypothetical instance was derived utilizing our price of residing calculator. Prices and calculations will fluctuate primarily based on inflation, amongst different elements.
How the 9 states with no earnings tax stack up
America’s largest state can also be thought of some of the tax-friendly. When Alaska repealed its private earnings tax in 1980, it started to tax firms concerned in oil and fuel manufacturing at excessive charges to generate income. The state’s imply efficient property price is 0.98%, and Alaska’s general state and native tax burden is 5.8%, the bottom within the nation. On the draw back, Alaska is distant — and costly in different methods. U.S. News & World Report ranks Alaska an general 47 out of fifty on its affordability record, making it the fourth-lowest rating state within the nation. Contributing elements embody higher-than-average housing prices and a steep price of residing relative to median household incomes. Most residents can obtain an annual stipend, the Alaska Permanent Fund Dividend, of as much as $2,000, which could assist offset some prices.
This southern state is a well-liked retreat for vacationers and retirees alike. Florida generates most of its income from state and native gross sales tax and tuition via state universities. This makes for an general state and native tax burden of 8.8%. While price of residing may not be a deal-breaker for most individuals, Floridians should should cope with a aggressive housing market and costs. U.S. News & World Report ranks the state at 41 out of fifty for housing affordability.
Nevada’s general state and native tax burden is 9.7%, which is on the excessive aspect. Most of the tax burden is pushed by gross sales and excise tax, together with groceries and alcohol, and taxes on hospitality and tourism-heavy industries resembling inns and gaming. Nevada is routinely ranked on the decrease finish of the dimensions in terms of affordability. U.S. News & World Report positions the state general at 41 out of fifty, with a selected nod to excessive housing prices. The efficient property tax price, however, is 0.56%, the ninth-lowest within the nation.
Unlike different states on this record, New Hampshire nonetheless taxes dividends and curiosity on funding earnings at a 5% price. This is ready to part out by 1% every year till it reaches 0% in 2027. The state additionally doesn’t impose gross sales taxes however levies excise taxes on items resembling tobacco. According to the Tax Foundation, the general state and native tax burden is 9.7%. New Hampshire additionally ranks effectively for housing affordability, however the price of residing and property taxes is the place it falls quick. The state’s imply efficient property tax price is 1.89%, making it the third-highest within the nation, trailing behind Illinois (No. 2) and New Jersey.
South Dakota, house to Mount Rushmore and Badlands National Park, is commonly lauded as one of many high areas for retirees. For affordability, South Dakota stakes a declare for the highest-ranking state on this record: U.S. News & World Report ranks it at 14 out of fifty nationally for its mixed housing and price of residing scores. South Dakota’s general gross sales and native tax burden is 9.1%; the state is determined by gross sales and excise taxes to generate income, levying taxes on gadgets resembling tobacco, motor gas and alcohol. Homeowners may not love the efficient property tax price of 1.14%, although, which locations it above many different states.
In 2017, Tennessee started the gradual repeal of the Hall Income Tax, which taxed curiosity and dividends on funding earnings. The phaseout performed out over a number of years, main as much as its full elimination in 2021. According to the Tax Foundation, Tennessee does impose a comparatively excessive gross sales tax, and it costs tax on gadgets resembling alcohol, beer, gas and even fantasy sports activities contests. Yet, its general tax burden is 7%, the second-lowest within the nation (tied with Wyoming and bested solely by Alaska). In addition, Tennessee’s efficient property tax price is 0.63%. As for affordability, the Volunteer State additionally shines right here. U.S. News & World Report ranks it an general 17 out of fifty.
Texas is the second-largest state within the U.S., and it’s extensively recognized for its “go big or go home” perspective. In reality, Texas’ aversion to earnings taxes is so sturdy the ban is listed within the state structure. The general state and native tax burden is 8%, making it one of many lowest within the nation, however the efficient imply property tax price, at 1.6%, is the sixth-highest within the nation. However, residing in Texas has its perks outdoors of taxes: U.S. News & World Report ranks the state as a strong 22 out of fifty for its general affordability and 14 out of fifty for the price of residing.
Not solely does the Evergreen State not have earnings tax; it additionally doesn’t impose a company earnings tax. This incentive is little doubt interesting to the numerous main firms which are headquartered within the state. Washington’s general gross sales and native tax burden is 9.8%, which is comparatively common. Where Washington falls quick is affordability. It takes the forty fourth spot on U.S. News & World Report’s affordability scale, with excessive housing prices being the first driver.
Wyoming is the least populated state within the U.S., with a complete of 576,851 residents calling it house, in keeping with 2020 Census information. The Cowboy State has an general gross sales and native tax burden of seven%, the second-lowest within the nation (tied with Tennessee). Because there’s no earnings tax, the state depends on property, oil, gross sales and excise tax to generate earnings. Wyoming scores barely above common in terms of price of residing and housing — U.S. News & World Report provides it an general affordability rank of 33 out of fifty.
