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Living in a state with no income tax is one strategy for lowering your overall tax burden.
As of 2021, eight states — Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington and Wyoming — do not levy a state income tax. A ninth state, New Hampshire, does not tax earned income, but it does impose a 5% tax on dividends and interest. This is set to expire in 2027.
Here’s a breakdown of what it means to live in a state without income tax, 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.
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 (where some people might see portions of their income taxed at 13.3%), 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 does not mean that you will be excused from paying other taxes. 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 Social Security benefits. However, residents of states without personal income tax generally get to skip paying state taxes on retirement plans, 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 wish to live far away from friends or close 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. So 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, 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. People who live in one location (say, New York) but spend 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 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. 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.* That’s an extra $15,000 you’ll have to earn to account for higher housing, food, transportation, and health care costs.
Think about your job as well. Remote work is expanding, making 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.
*This hypothetical example was derived using our cost of living calculator. Prices and calculations will fluctuate based on inflation, among other factors.
» MORE: Thinking about a move? Compare the cost of living in two cities using our cost of living calculator
How the 9 states with no income tax stack up
Note: State, local and property tax data come from tax policy nonprofit the Tax Foundation and is for the 2019 calendar year, the most recent year for available data.
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