In one way or another, taxes are a part of every American’s financial life. But for residents of Alaska, Florida, Nevada, South Dakota, Tennessee, Texas and Wyoming, they are off the hook for state-level personal income taxes. And those living in New Hampshire and Washington won’t have to pay personal income taxes either, but do face other taxes on dividends, interest and investments. 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.
States With No Income Tax
Alaska once had an income tax, but it was repealed in 1980.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While Florida’s personal income tax was repealed in 1855, its residents are required to pay other kind of taxes, including corporate income taxes and sales taxes.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.
While New Hampshire does not tax personal income, it currently has a 4% tax rate on dividends and interest. This rate will decline to 3% in 2024, 2% in 2025 and 1% in 2026, until it gets fully repealed in 2027.
South Dakota repealed its income tax in 1943 and all attempts to reinstate the tax have failed.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 just above 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.
Tennessee does not tax any forms of income. This includes both wages earned through jobs and income from investments, dividends and interest. However, as recently as 2020, Tennessee did have an income tax, which was known as the Hall Income Tax. In 2016, the state’s governor signed a bill that reduced the Hall Income Tax rate on investment income gradually. It was completely eliminated for tax periods that begin on Jan. 1, 2021, and beyond.
In the meantime, the Volunteer State will continue to rely on its high sales tax rates and sin taxes for revenue. For example, beer vendors must pay a state tax for each gallon they sell of $1.29.
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.
This state does not have personal or corporate income tax. But, you will have to pay a 7% tax on capital gains income. However, certain deductions and exemptions do apply. In addition, for those engaging in business, Washington imposes a business and occupation (B&O) and/or public utility tax, which is based on gross receipts.
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 0.57% 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.
Which States Tax Social Security and Retirement Accounts?
Where you live when you retire can have a major effect on your long-term retirement plans. Managing taxes is an important part of retirement planning, so choosing a state with favorable tax treatments of your retirement account withdrawals and Social Security benefits is a good place to start.
Here are all the states that don’t tax retirement account distributions whatsoever:
- New Hampshire
- South Dakota
In addition to the above states, Alabama and Hawaii do not tax pension plan withdrawals. However, they do tax withdrawals made from 401(k)s and traditional individual retirement accounts (IRAs).
When it comes to Social Security, 12 states tax Social Security to some degree:
- New Mexico
- Rhode Island
- West Virginia
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’re 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. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Check out SmartAsset’s annual roundup of the best tax filing software. This can help you get through this tax season as painlessly as possible.
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