9 States With No Income Tax
The benefit of moving to a state with no income tax is pretty straightforward: you don’t have to pay state income taxes on money you earn. Currently, seven states—Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, and Wyoming—don’t levy income taxes on individuals. Two others (New Hampshire and Washington) impose taxes only on certain types of income.
So, can moving to a state with no income tax help you keep more of your hard-earned money? Or will you end up paying in different ways that cancel out the benefit? Here’s what you need to know.
States With No Income Tax
Most states in the U.S. levy individual income taxes on people who live or earn money in the state. However, there are a few exceptions. As of 2022, nine states have no individual income tax or tax only certain types of investment income. Those states are:
- New Hampshire
- South Dakota
New Hampshire’s interest and dividend levies a 5% tax on interest and dividend income. However, that tax is scheduled to be phased out. The rate drops to 4% in 2024, 3% in 2025, 2% in 2026, 1% in 2027. After that, New Hampshire will repeal its interest and dividend tax entirely.
Since Jan. 1, 2022, Washington has taxed the capital gains income of high-earners. The state assesses a 7% tax on the sale or exchange of long-term capital assets, such as stocks, bonds, interest in a business, and other investments. The tax applies only to long-term capital gains over $250,000 per year. The first payments are due on or before April 18, 2023.
Is It Beneficial to Move to a State Without Income Tax?
Yes and no. The more you earn and the higher the tax rate in your state, the more you can potentially save by moving to an income tax-free state.
However, moving to a state with no income tax isn’t always beneficial. Every state needs money to fund public schools, build and maintain roads, pay state employees, and fund other projects and programs. If the state doesn’t get that money through state income taxes, it typically collects it from other taxes, such as property taxes or sales taxes.
For example, say you live in Massachusetts, which has a flat income tax rate of 5%, and your taxable income for the year is $120,000. That would translate into a tax bill of $6,000. If you moved to Florida, which has no state income tax, you could avoid that state income tax liability.
Here’s another example, Nevada doesn’t have an individual income tax. However, it has a state sales tax rate of 6.85%, which places the state at #7 on the list of U.S. states with the highest sales tax rates.
Plus, cities and counties can tack on their own local sales tax to that rate. In Nevada, the average local tax adds an extra 1.38% to the state sales tax, for a combined rate of 8.23%. In Clark County, Nevada, where Las Vegas is located, the county tacks on an extra 1.53%, for a combined rate of 8.38%.
Nevada’s economy depends heavily on tourism, so visitors pay a large percentage of Nevada’s sales tax revenue. Still, every time a Nevada resident buys furniture, home appliances, a motor vehicle, or other property, state and local sales taxes increase the final purchase price by roughly 8%.
Likewise, Texas doesn’t have a state income tax. But it’s one of the most expensive states to live in when it comes to property taxes. According to the Tax Foundation, Texas homeowners pay an average of 1.60% of their home value in property taxes. On a home valued at $300,000, that means $4,800 in property taxes per year.
Business owners can have a particularly tough time avoiding income taxes with an out-of-state move. This is because most states that levy an individual income tax apply it to all income sourced in the state — whether or not you’re living there.
For example, if you own a business based in California, moving across the border to Nevada won’t necessarily result in a massive increase in your tax liability. California taxes all California-source income. So even if you’re not a resident of the state, you would have to file a non-resident tax return and pay income taxes there.
Moving to a Low Tax State Can Cost You
Of course, taxes aren’t the only factor that may affect your decision to move. If you’re moving for a new job, to be closer to family, or for a better quality of life, then taxes may just be a side-effect of the move.
However, if your decision to move is at least partially motivated by a desire to escape high-income tax bills, it’s important to compare all of the costs of living before you pull up stakes.
Other factors that can impact the cost of living in a state include housing, food, transportation, child care, health care, car insurance, and utilities, to name a few.
You can use a cost of living calculator to compare the overall prices between different cities and states to see how much more or less you’d have to pay to live there.