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Financial PlanningTax PlanningA Guide to 9 States With No Income Tax - Navigating the...

A Guide to 9 States With No Income Tax – Navigating the Income Tax Landscape Before Moving

Attention Retirees & Remote Workers

Welcome to the wild world of states without a state income tax. Nine states have no income tax – Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. Or to put it another way – tax savings, warm weather, no state budget deficits to speak of. Sounds too good to be true, right?

Well before you pack your bags based on income tax alone, this guide will navigate the landscape of the no income tax states. We’ll cover everything from weighing up tax breaks against cost of living to tailoring financial advice across demographics. Think retirement nest eggs, property portfolios, college funds for the kids. By hitting the highlights you need to consider, the goal is to empower informed decisions should you consider a move.

If it’s free, why pay?

Here’s a table comparing the tax structures across states with no income tax:

StateIncome TaxSales TaxProperty TaxOther Key Points
Alaska state income taxNo statewide sales or income taxMunicipalities levy sales taxes up to 7.5%No estate or inheritance tax but high alcohol and fuel taxesAnnual Permanent Fund Dividend pays all residents from oil revenue
Florida 0 state income taxNo personal income tax6% sales tax across goods and servicesProperty taxes vary by county from 0.5% to 2.1%Tourism tax funds large share of budget
Nevada – a no state income taxNo personal income tax on wages or investments8.3% sales tax including on groceriesProperty taxes capped at 3% max rateTourism and gaming taxes major revenue source
New Hampshire state income tax5% tax on interest and dividends, no taxes on wagesNo sales taxAmong highest property taxes in U.S. averaging 2%9% tax levied on estates above $2 million
South Dakota state income taxesNo income tax on wages or investments4.5% state sales tax rateProperty taxes low relative to U.S. averageFinancial sector drives over 20% of taxes
State income tax in TennesseeNo income tax on salaries or wages, only dividends/interest7% state sales taxProperty tax rates vary across countiesEstate tax phased out by 2016
Texas state taxesNo state income tax6.25% statewide sales taxAvg. 1.9% effective property tax rateHigh property and energy sector taxes
Washington income tax rateNo income tax on salaries, wages or investments6.5% sales tax rate plus local leviesAvg. property tax 1% but differences across countiesEstate tax levied on transfers above $2.2 million
Wyoming 0% income taxNo income or estate tax4% state sales tax rateAvg. property tax rate 0.61% but county differencesNo tax on groceries but higher taxes on minerals

This table highlights how states with no income tax generate revenue through alternative taxes, giving an overview of the varying tax burdens and key financial aspects in each state. ​

Key Takeaways: States Without Income Tax

  • Understanding Tax Implications: In States Without Income Tax, the primary allure is obvious: more of your hard-earned money stays in your pocket. However, this simplicity masks a more complex reality. Each state compensates for the lack of income tax through a unique mix of sales, property, or other taxes. While this guide unveils these intricacies, remember that the financial impact can vary widely based on personal circumstances.
  • Comparative Tax Burdens: While you save on income tax, expect to encounter varying degrees of sales and property taxes. For instance, Texas compensates with high property taxes, while Tennessee leans on its sales tax. Understanding these nuances is crucial for an accurate financial assessment.
  • Quality of Life Considerations: Beyond tax savings, factors like education, healthcare, and infrastructure quality can significantly influence life in a no income tax state. These are often funded differently, affecting the overall living experience.
  • Retirement and Investment Implications: For retirees and investors, these states offer distinct advantages like tax-free withdrawals from retirement accounts and favorable conditions for investment incomes. However, estate taxes and investment returns are subject to state-specific rules that need careful consideration.
A list of the 9 States with no State Income Taxes
  • Why This Matters to You: As you dive deeper into this guide, you’ll gain insights not just into the financial mechanics of no income tax states, but also into how these factors holistically affect your life choices. Whether it’s planning for retirement, investing, or simply understanding the cost of living, each section of this article offers tailored advice to help you make informed decisions.
  • Keep Reading for More: Curious about how Texas balances its budget without income tax or how Florida’s tourism tax affects residents? Stay tuned for a comprehensive breakdown of each state’s unique financial landscape and what it means for you.

Let’s get into the first section on understanding how life changes financially in states free from income tax.

Understanding the Financial Implications Of Living In A State With No Income Taxes

The appeal of states without income tax is obvious – keeping more of your hard-earned cash. But the reality gets nuanced fast depending on your situation. What might rock your world financially in Texas could disappoint in South Dakota.

There are just 9 states in the U.S. that have no income tax. Here is a list of no income tax states:

For example, Nevada offers no individual tax, no corporate income tax, no estate or gift tax, and no inheritance tax. The only taxes Nevada does charge are: First-year residential occupant tax, sales tax (6.85%), and a median property tax rate (0.6%)  

  • Alaska
  • Florida
  • Nevada
  • New Hampshire
  • South Dakota
  • Tennessee
  • Texas
  • Washington
  • Wyoming

Tax Savings and Relocation Considerations

Let’s unpack the positives first. States raise revenue through some combination of sales tax, property tax, and income tax. Zero income tax states offset the gap by leaning on sales and property taxes. Residents pocket the difference with the average taxpayer saving $1,959 in state income tax each year.

How did I calculate this? Considering that residents of states with no income tax save on state income tax, we can estimate that the average taxpayer saving in these states is around the difference between the average state income tax rate (8.9%) and the average state tax burden in states with no income tax (4.6% to 7.6%). This would result in an estimated average taxpayer saving of approximately $1,959 to $3,371 per year, depending on the state. However, this is a rough estimate and may not be entirely accurate, as the actual savings would depend on an individual’s income and other factors.

Sweetening the deal further, payroll taxes, investments like capital gains tax and dividends face no state tax liability. And some states exclude certain retirement income from tax too.

States That Dont have income tax other revenue sources

Before chasing the money, weigh up the full implications…

Property taxes can vary widely – from 0.43% in Alabama to 2.13% in Illinois. New Hampshire is eliminating income tax, but remains among the nation’s highest property tax rates.

Plus state income tax accounts for around a third of state revenue. Without it, spending on public services often suffers over time – infrastructure, healthcare, education.

Factor in changes to cost of living too. Your state tax saving could wash away into housing costs in sizzling property markets like Texas and Tennessee.

And more and more people are choosing to make the move to states with no income taxes. Over 3 million Americans moved to states without individual income tax in the last several years.  

Three states alone make up a majority of these people – according to U-Haul’s most recent study. The biggest population decreases were the high tax states like California and New York. 

U.S. Population Migration Data

Insights from a Retired Financial Planner

  • Factoring in Overall Tax Burden: While the absence of state income tax is appealing, always consider the overall tax burden, including sales and property taxes.
  • Client Story: I’ve advised clients who moved to Texas for the tax benefits but were surprised by the high property taxes impacting their retirement budget.
  • Misconception: A common misconception is that moving to a no income tax state automatically results in significant savings. This isn’t always the case when other taxes and cost of living are considered.
  • Little Known Strategy: Some retirees split their time between states to optimize tax benefits while maintaining social ties. For example, spending winters in Florida and summers in a state with better healthcare services.
  • Expert Quote: As Warren Buffett said, “Taxes are what we pay for a civilized society.” Remember, taxes fund essential services which should also factor into your relocation decision.
  • Common Mistake: Overlooking the impact of sales tax and cost of living. It’s not just about income tax; evaluate how your overall expenses will change.
  • Personal Finance Analogy: Think of choosing a state to live in like selecting a mortgage plan. The lowest interest rate (or tax rate) isn’t always the best deal if other fees (like sales and property taxes) are higher.

Remember, a holistic approach is key. Look beyond just the tax rate and consider how the overall financial climate of a state aligns with your personal financial goals and lifestyle preferences.

Comparing Tax Structures Across No Income Tax States

Zero income tax can still mean varying tax burdens once you tally property, sales, and other taxes. And states split the difference on where they collect revenue through alternative taxes. Let’s break down highlights state-by-state.

Tax Burden Comparison of no state income taxes

Alaska

Alaska’s Unique Dividend: Residents receive dividends from oil revenue, a unique financial factor to include in your portfolio planning.

  • No statewide sales or income tax
  • Municipalities levy sales taxes up to 7.5%
  • Annual Permanent Fund Dividend pays all residents from oil revenue
  • No estate or inheritance tax but high alcohol and fuel taxes

Florida

Florida’s Attraction for Retirees: With no personal income tax and a robust tourism economy, it’s a haven for retirees. However, property taxes can vary significantly by county.

  • No personal income tax
  • No estate or inheritance tax
  • 6% sales tax across goods and services
  • Tourism tax funds large share of budget
  • Property taxes vary by county from 0.5% to 2.1%

The state government generates much of its revenue through a sales tax of 6%. When combined with county and local taxes, the sales tax can be as high as 8%.  These taxes are primarily aimed at tourists spending money while on vacation.

  • Average household earnings $80,986
  • Average home value $415,762
  • Tax Rate 0%
  • Average sales taxes 7.05%
  • Overall cost of living rating 100.3

Nevada

Nevada’s Balancing Act: The lack of income tax is balanced by sales tax on daily essentials like groceries, impacting your budget.

Just like Florida, Nevada is a major tourist destination and has one of the highest state sales tax revenue in the country, as well as one of the highest gasoline taxes. And of course, the heavily tax gambling.

  • No personal income tax on wages or investments
  • 8.3% sales tax including on groceries
  • Tourism and gaming taxes major revenue source
  • Property taxes capped at 3% max rate
States Without Income Tax Sales Tax Rates

New Hampshire

New Hampshire’s Tax Trade-Offs: High property taxes can offset the advantages of no income tax, particularly for real estate investors.

  • 5% tax on interest and dividends, no taxes on wages
  • No sales tax
  • Among highest property taxes in U.S. averaging 2%
  • 9% tax levied on estates above $2 million

So how does NH do it? With he nations 3rd highest property taxes, and high average home values.

Of all states, New Hampshire and Alaska rely the most on property taxes, with tax collections accounting for 67.6% and 51.8% 

South Dakota

South Dakota’s Property Appeal: Lower property taxes make it attractive for large property investments, bolstered by a strong financial sector.

South Dakota creates much of its revenue via very high taxes on alcohol, tobacco and fuel. South Dakota also has higher than average property taxes place, and spends the least amount in the country on education.

  • No income tax on wages or investments
  • 4.5% state sales tax rate
  • Financial sector drives over 20% of taxes
  • Property taxes low relative to U.S. average

Tennessee

Tennessee’s Sales Tax Consideration: High sales tax needs to be weighed against the benefits of no income tax, especially for regular consumers.

  • No income tax on salaries or wages, only dividends/interest
  • 7% state sales tax
  • Estate tax was phased out by 2016
  • Property tax rates vary across counties
  • In 2021, Tennessee eliminated the little bit of taxable income that remained.
  • If you live in Tennessee you will be paying way above-average sales taxes of 7%, the 2nd highest in the country.
  • To rub salt into that wound, is an average local sales tax rate of 2.55% on top of that. This makes Tennessee the highest combined tax state in the nation.
  • Throw in the “sin” taxes and the nations highest beer tax on top of that.

Texas

Texas for Entrepreneurs: A business-friendly environment with no state income tax, but high property and energy sector taxes need careful consideration.

Most Texans Pay More In Taxes Than Californians

  • No state income tax
  • 6.25% statewide sales tax
  • Avg. 1.9% effective property tax rate
  • High property and energy sector taxes
  • Texas amended their state constitution in 2019 to no longer allow a state income tax. 

Overall, life in Texas is quite affordable – being the most affordable state with no income taxes.

  • Average annual earnings $96,468
  • Average home value $314,718
  • Tax Rate 0%
  • Average sales taxes 8.19%
  • Overall cost of living rating 92.1
No Income Tax States Average Property Tax Rates

Washington

Washington’s High-Income Earner Appeal: No income tax on salaries or investments is a draw, but estate taxes on larger estates must be planned for.

  • No income tax on salaries, wages or investments
  • 6.5% sales tax rate plus local levies
  • Estate tax levied on transfers above $2.2 million
  • Avg. property tax 1% but differences across counties

Wyoming

Wyoming’s Everyday Living Costs: With no tax on groceries and lower property taxes, it’s favorable for minimizing day-to-day living expenses.

  • No income or estate tax
  • 4% state sales tax rate
  • No tax on groceries but higher taxes on minerals
  • Avg. property tax rate 0.61% but county differences

Sources for the above:

More States With Low Income Taxes (2024)

StateState Income Tax Rate
North Dakota2.9%
Pennsylvania3.07%
Indiana8.53%*
Michigan4.25%
Arizona4.5%
Colorado4.63%

Financial Planning Strategies for No Income Tax States

If the prospect of keeping more of your paycheck appeals, time to flip things to the planning stage. Financial strategies and investment approaches vary across life stages when income taxes no longer take a bite.

As a retired financial planner with decades of experience, I’ve seen firsthand how tax structures impact financial planning. In the U.S., there are nine states known for not levying personal income tax. These states are Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. Let’s delve into some key facts, strategies, and insights about these states, presented in both table and bullet list formats.

Table Format: Overview of No Income Tax States

StateUnique AttributesFinancial Planning Insight
Alaska– Pays residents from oil revenues
– High living costs
Consider the Permanent Fund Dividend in investment planning.
Florida– Tourism-driven economy
– Varied property taxes
Ideal for retirees; watch for varying county property taxes.
Nevada– Revenue from gaming and tourism
– Sales tax on groceries
Weigh the benefits of no income tax against higher sales taxes.
New Hampshire– High property taxes
– No sales tax
Factor in property taxes for real estate investments.
South Dakota– Low property taxes
– Financial sector driven
A good choice for those with larger property portfolios.
Tennessee– High sales tax
– No estate tax since 2016
Consider for investment income, but beware of sales taxes.
Texas– Business-friendly
– High property and energy sector taxes
Great for entrepreneurs, but factor in property taxes.
Washington– Corporate attraction
– Estate tax over $2.2 million
Attractive for high-income earners, plan for potential estate tax.
Wyoming– No tax on groceries
– Lower property taxes
Beneficial for those looking to minimize everyday living costs.

Retirement Planning Opportunities

Retirees stand to gain from relocating to income tax-free states. Escaping state income tax introduces advantages for retirees. You can withdraw funds from IRAs and 401ks free from state tax liability. The same goes for Social Security income along with pensions, annuities and other retirement plan disbursements.

Tourism-reliant economies in Florida and Nevada also limit taxes on out-of-state retirement income.

Strategically locating across state lines unlocks further savings. Spend over half the year in income tax-free Florida but summer in Pennsylvania to retain lifelong health and social ties. Part-year resident rules allow you to avoid taxes on the portion earned outside Florida.

Besides retirees, the tax structure incentivizes holding assets that throw off dividends, interest and investments returns. Contributions to 529 college savings plans also grow tax-free compared to many states with income tax.

Retirement Tax Free States

For more on this, read: Taxes On Inheritance & How They Affect You!

Quality of Life in No Income Tax Havens

State tax breaks offer one piece of comparing future locations. Quality lifestyle factors enter the decision just the same – whether schools measure up or weekend fun shines brighter. Here’s what to expect across some highlights.

Education and Infrastructure

Chasing low taxes can mean leaner state budgets for roads, schools and social services. Trade-offs between tax rates and education funding become visible over time. Since the 2008 recession, one third of states have cut education funding by 7-8% – including income tax free Alaska.

Texas and Florida also rank below average for pre-K through 12th grade in national quality assessments. Meanwhile New Hampshire and Wyoming earn high marks for elementary and high school quality indicators like test scores and graduation rates.

Infrastructure spending has declined in 17 states when adjusting for inflation since 2002. South Dakota stands out with high marks for road quality – explaining no state tax on wages and investments.

Comparing Livability and Lifestyle

Affordable living also attracts families and individuals to income tax-free states. Texas and Tennessee offer competitive housing among the nation’s major metro areas. Healthcare and utility costs in Wyoming and South Dakota also compare favorably to income tax states California and Oregon.

“States without an income tax are like little children.

They have no money, but they have everything.”

Lifestyle amenities can bolster the argument further in warm weather destinations like Florida and Texas. Retirees note the lack of snow shoveling while families highlight attractions from beaches to theme parks. Nevada balances desert recreation like Lake Tahoe along with big city amenities in Las Vegas and Reno.

You can read further about this topic in this BankRate article: Is Living In A State With No Income Tax Better Or Worse?

Addressing Key Questions and Misconceptions

Before hauling your life to a new state, common questions arise. Does my overall tax burden change? What unexpected challenges pop up? Am I really better off financially? Here are insights on key issues to clarify any lingering myths.

How Income Tax Absence Impacts Overall Taxes

It’s easy to see “no income tax state ” and assume you’ll have extra cash to save or spend. But state and local taxes still contribute an average 10% across the country regardless of income tax policy. Vice taxes on hotel rooms and rental cars allow tourists to help foot the bill.

While income tax evaporates, property and sales taxes collect more compared to U.S. averages as the trade-off. And don’t forget Uncle Sam still expects federal taxes on salary and investments each April. Eliminating state income tax reduces the overall burden but doesn’t axe it completely.

Here is an amazing research report on the inequality of state and local tax for those that are interested

Individual Income Tax as a Proportion of State Tax Revenue

Individual Income Tax as a Proportion of State Tax Revenue

Source: U.S. Census Bureau

Hidden Costs to Understand Before Moving

Look before you leap to understand where new costs hide when income taxes disappear.

  • Property taxes consistently exceed national benchmarks – whether the soaring home prices in Texas or higher tax rates across Tennessee counties.
  • Tourism hotspots like Florida also tack on parking fees, highway tolls and other nickeled-and-dimed expenses for families.
  • Comparing the whole financial picture clears up myths.
  • Income taxes may vanish but households still pay thousands annually in property, sales and auto taxes needed to fund state expenses.

What states avoid in income taxes also reappears in public colleges and universities charging tuition rather than offering free education.

If you look at the picture below from this great article, you will see where the income tax free states generate their revenues.  I personally found it most interesting that none of the “zero tax states” are much lower than the median.  Once again, they have all shifted their tax revenue from an income tax to an excise tax, that’s all.

What do states without an income tax do

Source

Next Steps – Evaluating States With No Income Tax

Decisions around where you call home bring life-shaping change – for better or worse. Simply chasing hypothetical tax savings fails to address realities around cost of living, financial planning challenges and lifestyle priorities.

Hopefully this guide about no income tax states empowers more informed decisions about possible relocation. We covered related tax burdens beyond income and how public services adapt. Tailoring financial plans to life stage – from college savings to estate planning – now seems more feasible.

Considerations of moving to a no state income tax area

Zero income tax tempts across nearly 20% of states now now that New Hampshire and Nevada have joined the club as of 2024. Take time to crunch numbers across property taxes, include hidden costs and weigh total tax liability regardless of income tax policy.

The bottom line remains finding the right fit across finances and lifestyle. Turn down income taxes while still gaining access to quality infrastructure and education systems. Locate in states actively investing to compete for tomorrow’s jobs and families. No income tax seems alluring – but understand how states creatively redistribute revenue sources before buying in.

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Note: The content provided in this article is for informational purposes only and should not be considered as financial or legal advice. Consult with a professional advisor or accountant for personalized guidance.

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  • Sharing the article with your friends on social media – and like and follow us there as well.
  • Sign up for the FREE personal finance newsletter, and never miss anything again.
  • Take a look around the site for other articles that you may enjoy.

Note: The content provided in this article is for informational purposes only and should not be considered as financial or legal advice. Consult with a professional advisor or accountant for personalized guidance.

Michael Ryan
Michael Ryanhttps://michaelryanmoney.com/
Who Am I? I'm Michael Ryan, a retired financial planner turned personal financial coach. And author and found of blog. My advice is backed by decades of hands-on experience in finance and recognition in esteemed publications like US News & World Report, Business Insider, and Yahoo Finance. 'here'. Find answers to your financial questions, from budgeting to investing and retirement planning, on my blog michaelryanmoney.com. My mission is to democratize financial literacy for all.
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