When it comes down to it, no one likes paying taxes. In fact, some Americans even specifically seek out tax-free states to call home to avoid one of the largest contributors to their annual tax bill; especially if they are trying to improve their finances. While there aren’t any no-tax states, there are currently seven states in the U.S. that do not have any income taxes: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming
Despite the fact that residents living in states with no income tax might save money in one way, they might pay more in others because the loss of revenue is usually compensated with other taxes. In this article, we’ll dive deeper into what living in a state without income tax means based on certain circumstances so you can determine whether it’s financially beneficial to you.
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What States Have No Income Tax?
While there are technically nine states that don’t have income taxes on salaries and wages, there are only seven that are completely income-tax-free: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. The other two, Tennessee and New Hampshire, still have some income-related taxes.
Let’s dive a little deeper into the details on the tax situation in these states with no income tax:
Alaska has not had an income tax since 1980. While there have been several attempts to reinstate the personal income tax over the years, they have not been successful. The state government decided to repeal income tax after the completion of the Trans-Alaska Pipeline System, which created billions of dollars in revenue.
Florida does not have a statewide personal income tax; it was repealed in 1855. However, they do have a corporate income tax.
Nevada does not have a personal or corporate income tax. One reason Nevada is able to forgo income taxes is because the state brings in a large source of revenue from gambling and other tourism sources.
South Dakota has not had an income tax since 1943. However, they do have a variety of special taxes that are applied to many goods and services including a precious metal and energy mineral severance tax, alcohol occupational tax, and various licensing fees.
The state of Texas does not have an income tax. Over the years, many lawmakers and taxpayers alike have fought to maintain this policy.
For decades, Washington has had a state income tax prohibition. However, there has been significant controversy over this policy over the last few years.
Wyoming taxpayers have it fairly easy with no personal or corporate income tax and relatively low taxes overall.
New Hampshire does not tax on salary or wages, but there is a 5% interest and dividends tax (I&D tax). However, the tax will be eliminated by 2025. The state plans to reduce the tax by 1% each year, starting in 2020, to phase out the T&D tax.
Once this happens, New Hampshire is poised to be one of the most tax-friendly states.
Similarly, Tennessee does not tax salaries and wages, but income from interest on bonds, notes, and dividends from stock are taxable. This is known as the Hall Income Tax and is applied at a rate of 2% for tax years beginning January 1, 2019, and 1% taxable income for years beginning January 1, 2020.
Like New Hampshire, a bit of good news for Tennessee taxpayers is that the Hall Income Tax will be eliminated by 2022. This means that Tennessee will be completely income tax free in just a few years.
Do Any States Have No Income Tax and No Sales Tax?
In the strictest terms, there are no states that truly have no income tax and no sales tax. However, Alaska and New Hampshire technically qualify if you consider their unique circumstances:
- Alaska: Alaska does not have a statewide sales tax but some local jurisdictions do impose their own sales taxes.
- New Hampshire: In addition to not taxing salaries and wages, New Hampshire does not have a state sales tax.
While they do have income taxes, there are some other states that don’t have statewide sales taxes: Delaware, Montana, and Oregon. However, in Montana, certain resort destinations such as Big Sky do impose local sales taxes.
Does Living in a No Income Tax State Mean You Don’t Pay Any Income Taxes?
It is important to note that there are no completely tax-free states in the U.S. Just because you live in a state with no income tax doesn’t mean that you are completely off the hook from income taxes altogether. You may need to pay federal income taxes if you exceed the threshold based on your annual income.
There are also two instances where you may need to pay income taxes to another state:
- If you are a resident of a state with no income taxes but work in a state that does have income taxes
- If you work in a state that does not have income taxes but live in a state that does have income taxes
Aside from income taxes, you could still have to pay other taxes that apply to you on both the state and federal level. Fortunately, recent tax reform has lowered federal tax bills for many Americans.
How Does Not Having a State Income Tax Affect You?
It might seem ideal to live in a state with no income tax, and for some, that may be true. After all, you’d most likely be taking home more pay from your job that you worked so hard for. However, there are certain factors to consider that may make it less beneficial for certain individuals.
Higher Rates for Other Taxes
According to TaxFoundation.org, states with no income tax have to generate tax revenue in other ways. As such, you’ll likely be paying higher:
- Property taxes: Property taxes are imposed on homeowners and are usually determined by the local jurisdiction you live in.
- Sales taxes: These taxes are paid by taxpayers on goods and services. In addition to higher statewide sales taxes, local jurisdictions often have the ability to increase their city or county sales tax rate.
- Excise taxes: These are additional taxes charged on certain goods and services. Some of the most common excises taxes are assessed on gasoline, cigarettes, and alcohol.
Overall Cost of Living
In addition to paying higher property and sales taxes, the cost of living may be higher than some states that still have income taxes. It is not uncommon for taxpayers in these states to pay more for housing, gas, healthcare, and college tuition. Additionally, essentials like utilities, healthcare, and food costs might even be significantly more costly.
Quality of Life
Without the revenue from income taxes, some states don’t invest as much in critical initiatives like education. The job market is also important to consider. If there are not a lot of job opportunities for your industry in the state, it could make it much more difficult to achieve financial stability.
Additionally, the state’s economic health, political standing, and culture could also impact your quality of life.
How Does the Tax Burden Compare in States with No Income Tax?
Compared to the other 43 states, these seven income-tax-free states all rank in the lower half in regards to the overall tax burden. In fact, Alaska has the lowest overall tax burden in the nation.
Despite their lower tax burden rankings, that does not necessarily mean that they are always the most affordable states.
Is It Better or Worse to Live in a State with No Income Tax?
Whether or not it is beneficial for you to live in a state without income tax depends on your circumstances and lifestyle. To accurately weigh the pros and cons, consider some of these points:
- Whether you plan to buy property. If you’re not a property owner, you won’t have to pay property taxes. However, you still might be faced with higher rental costs.
- If public education is a priority. This typically applies to those with children. Since some of these states have lower public funding, their education system may suffer.
- Your spending habits. If you live in a state with high sales taxes and shopping is one of your largest expenses, it might be less advantageous for you to live in an income-tax-free state.
In the end, you want to be able to determine whether you’d actually save money by not paying income taxes, or if the additional taxes and cost of living would actually cause you to spend more.
Remember, when you’re trying to determine your living budget, you want to use your annual net income. Using your gross income vs. net income can make a significant difference when trying to establish the most accurate plan for what you can afford.
If you do get into a situation where you can’t afford your cost of living, let alone your tax bill, it’s important to take the right steps to correct your course. Neglecting to pay your taxes and accumulating back taxes can severely impact your credit.
Paying Lower Taxes Isn’t the Only Way to Improve Your Finances
When trying to improve your personal finances, it’s important to consider all of your options carefully. If changing your state of residence isn’t the right solution for you, you have plenty of alternatives. Whether you’re focused on paying off student loans, credit card debt, or saving up to buy a home, using financial planning and management tools like Turbo’s free mobile app is a great first step toward financial freedom.