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Living in a state with no income tax is one strategy for lowering your overall tax burden.
Here’s a breakdown of what living in a state without income tax means, what benefits you might enjoy and what drawbacks you could expect. Plus, see a quick head-to-head analysis of how these nine states with no income tax match up regarding other taxes and living costs.
States with no income tax
As of 2023, nine states — Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming — do not levy a state income tax.
While New Hampshire does not tax most earned income, it does impose a 4% tax on dividends and interest. This rate will drop to 3% in 2024, and the tax will phase out completely in 2025. Washington also levies a long-term capital gains tax rate of 7% on assets that were sold for a profit of $250,000 or more.
And though Washington doesn’t tax most earned income, in July 2023, the state implemented the WA Cares Fund. The program deducts 58 cents per $100 from employees' paychecks to be funneled into the state’s long-term care program.
What does it mean to live in a state with no income tax?
At the most basic level, living in a state with no personal income tax means that you’ll get to keep a little bit more of your paycheck. And if you’re currently living in a state with high personal income tax rates like California, it can seem tempting to pack your bags and book a one-way ticket to Washington. However, moving to a state without an income tax doesn’t mean that you’ll be excused from paying other taxes. For example, if you meet the income qualifications for filing a federal return, you’ll still be expected to do so by the tax filing deadline.
Pros and cons of living in a state without income tax
Most people can expect to pay at least some taxes during retirement — whether on 401(k) distributions, pensions or even Social Security benefits in some states. However, residents of states without personal income tax generally get to skip paying state taxes on retirement income, which can mean more money for your golden years.
Avoiding additional taxes can be a nice retirement perk, but make sure you weigh the tax benefits of moving against other important financial (and personal) 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. You might also not want to live far away from friends or family.
State taxes are often used to generate revenue for services such as health care or to fund infrastructure. Without this revenue stream, some states end up relying more heavily on other taxes, such as property or sales, to recoup the loss. If you're a homeowner who currently lives in a state with relatively affordable property taxes, it may not be worth giving that up. And, importantly, living in a state with no income tax also means you might not be able to take full advantage of the state and local tax deduction if you itemize on your federal return.
On the plus side, except for New Hampshire and Washington, living in an income-tax-free state does mean that any capital gains you earn are protected from state taxes. This means that you’ll be liable only for any capital gains taxes on the federal level, which are calculated based on how long you held the asset before selling it.
» MORE: Explore other ways of lowering your capital gains burden
Several conditions need to be met to reap the benefits of living in an income-tax-free state. Establishing domicile, or the intention of making a state your permanent home, is the most critical one. Rules and requirements vary from state to state, but generally, you must live in a place for at least half of the year, 183 days, to begin qualifying as a permanent resident. In addition, states conduct residency audits, so this will require proof.
Tread carefully here. Someone who lives in one location (say, New York) but spends a good part of the year in another state (say, North Carolina) could be considered a permanent resident of one state and a “statutory resident” of the other for tax purposes. This means they could end up paying taxes on earned income in both states. Tax planning with a professional, such as a financial advisor, is one of the best ways to avoid finding yourself in a sticky tax situation.
Cost (and quality) of living
Perhaps the most critical number to crunch is your cost of living. This 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 incurred to live comfortably in another state.
Think about your job as well. Remote work has made it easier than ever to envision moving without risking job security. But if you were to live in a state with limited opportunities in your particular industry and something disrupted your employment, you could face difficulties securing another job.
» MORE: Thinking about a move? Compare the cost of living in two cities using our cost of living calculator
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How the 9 states with no income tax stack up
America’s largest state is also considered one of the most tax-friendly. When Alaska repealed its personal income tax in 1980, it began to tax companies involved in oil and gas production at high rates to generate revenue. Alaska’s overall state and local tax burden is 4.6% as of 2022, the lowest in the nation.
On the downside, Alaska is remote — and expensive in other ways. U.S. News & World Report ranks Alaska an overall 40 out of 50 on its affordability list. Contributing factors include higher-than-average housing costs and a steep cost of living relative to median family incomes. Most residents can receive an annual stipend, the Alaska Permanent Fund Dividend, of $1,312, which might help offset some costs.
This southern state is a popular retreat for vacationers and retirees alike. Florida generates most of its revenue from property taxes, highway tolls and state university tuition. This makes for an overall state and local tax burden of 9.1% as of 2022. 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.
Learn more: Other Florida state tax payments to know about
Nevada’s overall state and local tax burden is 9.6% as of 2022, which is on the high side. Most of the tax burden is driven by sales and excise tax, including groceries and alcohol, and taxes on hospitality and tourism-heavy industries such as hotels and gaming. Nevada is routinely ranked at the lower end of the scale when it comes to affordability. U.S. News & World Report positions the state overall at 34 out of 50, with a particular nod to high housing costs. The property tax rates, on the other hand, are among the lowest in the country.
Unlike other states on this list, New Hampshire still taxes dividends and interest on investment income at a 4% rate. This rate will decrease to 3% in 2024, and the tax will be completely phased out in 2025. The state also doesn’t impose sales taxes but levies excise taxes on goods such as tobacco.
According to the Tax Foundation, the overall state and local tax burden is 9.6% as of 2022, which is relatively low compared to other states. Where New Hampshire falls short is affordability (ranking 36 out of 50) and cost of living (ranking 39 out of 50). New Hampshire is also known for its relatively high property taxes.
South Dakota, home to Mount Rushmore and Badlands National Park, is often lauded as one of the top locations for retirees. For affordability, U.S. News & World Report ranks it at 8 out of 50 nationally for its housing and cost of living scores. South Dakota’s overall sales and local tax burden is 8.4% as of 2022; the state depends on sales and excise taxes to generate revenue, levying taxes on items such as tobacco, motor fuel and alcohol. Homeowners might not love the effective property tax rate though, which is higher than many other states.
According to the Tax Foundation, Tennessee does impose a high sales tax, and it charges tax on items such as alcohol, beer, fuel and even fantasy sports contests. Yet, its overall tax burden is 7.6% as of 2022, the third-lowest in the country (behind Wyoming and Alaska). As for affordability, U.S. News & World Report ranks it an overall 14 out of 50.
Texas is the second-largest state in the U.S., and it’s widely known for its “go big or go home” attitude. In fact, Texas’ aversion to income taxes is so strong the ban is listed in the state constitution. The overall state and local tax burden is 8.6% as of 2022, making it one of the lowest in the country. However, Texas’ overall affordability and cost of living rankings come in on the lower end, with U.S. News & World Report rating the state 33 out of 50 in both categories.
Not only does the Evergreen State not have income tax; it also doesn’t impose a corporate income tax. This incentive is no doubt appealing to the many major corporations that have headquarters in the state. However, with the state’s new WA Cares Fund, residents now see a deduction of 58 cents per $100 from each paycheck that goes toward a long-term care fund. The state also imposes a 7% long-term capital gains tax on assets sold for a profit of $250,000 or more.
Washington’s overall state and local tax burden is 10.7% as of 2022, which is relatively average. Where Washington falls short is affordability. It takes the 46th spot on U.S. News & World Report’s affordability scale, with a high cost of living and high housing costs being the primary drivers.
Wyoming is the least populated state in the U.S., with a total of 581,381 residents calling it home, according to 2022 Census data. Because there’s no individual or corporate income tax, the state relies on property, oil, sales and excise tax to generate income. Its overall state and local tax burden is 7.5% as of 2022, the second-lowest in the country. Wyoming scores above average when it comes to cost of living and housing — U.S. News & World Report gives it an overall affordability rank of 18 out of 50.
Note: State, local and property tax data come from tax policy nonprofit the Tax Foundation and is for the 2022 calendar year, the most recent year for available data.
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