In one way or another, taxes are a part of every American’s financial life. But for residents of Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming, they are off the hook for state-level personal income taxes. Additionally, two states tax dividends and investment income, but not wages. While avoiding state income taxes may seem appealing, there’s often a catch, like high sales taxes. A financial advisor can help you optimize a tax planning strategy for your financial goals. Let’s take a closer look at states with no income tax.
States With No Income Taxes
Alaska once had an income tax, but it was repealed in 1980. The state doesn’t have a sales tax either (though some localities do charge a sales tax). What’s more, every resident receives extra money every year from the Alaska Permanent Fund Corporation.
Instead of collecting sales taxes and personal income taxes, the Alaska state government relies on other types of taxes (including excise and severance taxes) to fund its operations. Most of its revenue comes from gas production and oil drilling. But due to the decline in oil prices, the governor has proposed that the personal income tax be reinstated to reduce its budget deficit.
While Florida’s personal income tax was repealed in 1855, its residents are required to pay other kind of taxes, including corporate income taxes and sales taxes. The property taxes in Florida that local governments levy are higher than they are in most states.
The Silver State has no trouble operating without a personal or corporate income tax. Thanks to the millions of tourists who visit the state each year, it manages to collect nearly a billion dollars from gambling taxes and fees. Nevada also gets its revenue from its high sales taxes (above 8% in some areas), sin taxes and taxes on the casino and hotel industries.
South Dakota repealed its income tax in 1943 and all attempts to reinstate the tax have failed. To cover its costs, the Mount Rushmore State levies taxes on the purchases of cigarettes and alcoholic beverages. It even has coin-operated laundromat license fees.
South Dakota is one of the most tax-friendly states, especially for retirees. Its sales tax rates are among the lowest in the nation and its average effective property tax rate is only a bit higher than the national average. Personal and property taxes are collected by local governments and used to provide funding for public school systems and city- and county-level projects and services.
The Texas Constitution forbids personal income taxes. Instead of collecting income taxes, Texas relies on high sales and use taxes. When paired with local taxes, total sales taxes in some jurisdictions are as high as 8.25%. Property tax rates in Texas are also high. In fact, only a handful of states have higher property tax rates.
Washington state has never had a personal income tax. As recently as 2010, residents maintained that tradition by voting against a proposed income tax that would have raised taxes on the state’s richest residents. Regardless of wealth, Washington taxpayers pay some of the highest sales taxes. The combined state and average local rate is over 9%. Gas prices are also usually high. While there’s no corporate income tax, businesses in Washington are required to pay other taxes including the business and occupation tax.
If you want to live somewhere with low tax rates, you might want to consider moving to Wyoming. With no personal or corporate state income taxes, the Cowboy State also refrains from assessing any taxes on retirement income. Its average effective property tax rate is only about 0.6% and its average sales tax rate is just under 5.5%.
To make up for not having an income tax, Wyoming generates most of its revenue by levying property taxes and taxing businesses that produce natural resources, like coal.
States That Tax Investment Income, But Not Wages
While it doesn’t have a personal income tax, Tennessee does tax some dividends and interest. But that will change soon. In 2016, the governor signed a bill that will reduce the income tax rate on investment income by 1% every year until 2022, when the tax (known as the Hall income tax) will officially disappear.
In the meantime, the Volunteer State will continue to rely on its high sales tax rates and its sin taxes for revenue. It currently has the highest state tax rate on beer. As of January 2020, the excise tax rate is $1.29 per gallon.
Besides Tennessee, New Hampshire is the only other state that collects taxes on dividends and interest, but does not assess personal income taxes. The tax rate on investment income is 5% and it affects single taxpayers who earn more than $2,400 each year from their investments (or $4,800 for joint filers).
While there’s no state sales tax, the Granite State does levy excise taxes, including one on alcohol sales. New Hampshire’s average effective property tax rate of 2.2% is the third-highest in the nation.
Moving to one of the states with no income tax may seem like a great idea. But it’s important to find out whether you’ll have to pay additional taxes (like sales taxes and property taxes) in exchange for not having a personal income tax. If you are moving to a state with no income tax, you probably want to see how your budget will be affected. If you want help with how it will impact your finances or are looking for some assistance to help you meet your financial goals in general, a financial advisor might be useful.
Tax Planning Tips
- Taxes claim a major portion of most Americans’ paychecks, even if they live in a state that has no income taxes. So if you want to create a long-term financial plan for you and your family, you’ll need to account for taxes. A financial advisor can be a great resource during the financial planning process, and SmartAsset’s free matching tool makes it easy to find suitable options in your area. Get started now.
- Even if you live in a state that has no income taxes, you should know about how much you’ll pay in federal income taxes. SmartAsset’s federal income tax calculator can help you determine about how much you can expect to owe come tax time.
- Our annual roundup of the best tax filing software can help you get through this tax season as painlessly as possible.
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