United States income tax treaties A to Z Internal Revenue Service

While you may find some financial benefits of living in a state with no income tax, remember that all states need to raise revenue. In some income-tax free states you may find that you’re paying much more in property taxes, sales taxes, as well as excise taxes on things like alcohol and tobacco. Sales tax helps make up for the lack of personal income tax in Washington, as the state has the fourth-highest sales tax rate in the country. That fact, combined with high housing costs, make it the 12th most expensive place to live, according to MERIC data. States without income tax have to find other ways to fill their coffers. That might mean paying more in property taxes or sales taxes.

Total Tax Burden: 6.05%

This has since improved as the latest report from 2020 shows South Dakota spending $12,495 per capita, climbing to 8th in the nation. It spent $11,564 per student in 2022, less than any other neighboring Midwestern tax free states in us state. Alaska has one of the highest and fastest-rising healthcare costs of any state in the U.S. That said, at $13,642 per capita in 2020, it also spent the most on healthcare, excluding the District of Columbia.

Total Tax Burden: 6.44%

South Dakota and Wyoming—two states that don’t have an income tax—spent the least of all states on education, according to a 2021 Census Bureau analysis. Second, many states with no income tax boast a tax-friendly climate that creates jobs and attracts new residents from all over the country. 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. 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.

Which States Have No State Income Tax?

Pennsylvania also exempts private-sector pension income, and Alabama doesn’t tax income from defined-benefit retirement plans and many other types. Hawaii doesn’t tax income from contributory retirement plans, nor does it tax Social Security payments. The tax on interest and dividends is being phased out over a five-year period.

The Effect on Your Federal Tax Return

Its property tax is a little higher than the national average of 1.07%, but nonetheless, this is a tax-friendly state. As the old saying goes, “There is no such thing as a free lunch.” And unless you’re Jeff Bezos, you’re probably paying state taxes when you get paid, or at tax time if you’re an entrepreneur. This money is used to fund things like public education, health care, state parks, economic development, state police, and so much more. If you find yourself in the top federal tax bracket of 37% (Tax Year 2022), you may already think that is a large enough pill to swallow. Adding state income tax on top of that may be enough for some high earners to think about relocating to a state income tax-friendly state.

Pros and Cons of Living in a State with No Income Tax

Colorado, for example, provides taxpayers ages 55 and older with a retirement income deduction of up to $20,000, and up to $24,000 for those 65 and older. And Georgia allows taxpayers age 62 and older to exclude up to $35,000 of their retirement income, while those 65 and older can exclude $65,000. According to the Tax Foundation, Tennessee does impose a high sales tax, and it charges tax on items such as alcohol, beer, fuel and even fantasy sports contests. Yet, its overall tax burden is 7.6% as of 2022, the third-lowest in the country (behind Wyoming and Alaska). This means they could end up paying taxes on earned income in both states. Tax planning with a professional, such as a financial advisor, is one of the best ways to avoid finding yourself in a sticky tax situation.

At present, seven states—Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, and Wyoming—levy no state income tax at all. In addition, Washington levies an income tax on investment income and capital gains, but it is only for certain high earners. Elsewhere, New Hampshire currently taxes investment and interest income but is set to phase out those taxes starting in 2023.

But ultimately, these types of taxes are negligible when you consider the fact that Florida residents pay no income taxes, while people in states like California are paying an extra 13%. Today, the amount of income tax you must pay is easily calculated in software used when preparing your annual individual tax return. We recommend using the services of a professional tax preparer, Enrolled Agent (EA), or Certified Public Accountant (CPA) to prepare your tax return. Using a tax professional will greatly increase the likelihood that your tax return is prepared accurately and that you are taking advantage of all the tax credits and deductions available for taxpayers.

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However, New Hampshire taxes dividends and interest, and Washington taxes some capital gains. The United States has tax treaties with a number of foreign countries. These reduced rates and exemptions vary among countries and specific items of income. Under these same treaties, residents or citizens of the United States are taxed at a reduced rate, or are exempt from foreign taxes, on certain items of income they receive from sources within foreign countries. The property taxes are not necessarily the lowest either, making Washington a tax-neutral state in our opinion. Now, where Texas is different from Tennessee is that it has a significantly higher property tax rate.

Some states have higher taxes than others, while other states have no state income taxes at all. If you read until the end of this post, you’ll find out the top tax-free states and the lowest overall tax rates in the country. Generally, states are not overly wealthy since they don’t have a state income tax. These states traditionally will have different revenue plans to raise the revenue needed to run the state. This may require other sources to be higher compared to states with state income tax.

Despite being a haven for retirees, the cost of living in Florida is actually a little above average, with the highest expenses being groceries, housing, and utilities. Theoretically, if everyone moved to the nine states with no income tax, we would all be able to keep more of our hard-earned cash. “I would tell you, if I had stayed in Alabama, I wouldn’t pay out-of-state tuition, which would’ve offset the income tax that I would’ve had,” he says.