Best States For Income Tax

Are There Any States With No Property Taxes

All 50 states and the District of Columbia levy property taxes. However, some people may qualify for a property tax exemption. Some states offer homestead exemptions, while other types of exemptions exist for older homeowners, people with disabilities, military veterans, and homeowners who make certain renovations or install renewable energy systems .

Your Top 3 States With No Income Tax

So whats left?

Florida income tax is zero. Texas income tax is zero. And Nevada income tax is zero.

Thats a great start, but what else is so great about living in these states, for high net worth individuals?

Lets take a look at seven of the broadest benefits of living in states with no income tax.

And to be clear:

Every state has its own minor differences and tax laws can change at any time. These are general benefits and do not necessarily apply to all these states. Consult your tax accountant or wealth manager for specifics.

Living as residents in these states with no income tax, you will probably be able to claim your sales tax as a deduction for your federal taxes.

The only caveat to this is if you own a lot of real estate in these states or make some large purchases that incur five or six figures in sales taxes. In those instances, you would lose out on the highest possible federal tax burden. But since no state can offer any tools around that, its a non-factor in terms of where you choose to live.

When you die, the state governments of Florida, Texas, and Nevada wont take any of your wealth.

Click to Tweet: Florida, Texas, Nevada: No income tax, and no estate tax

Without an income tax, you will not have to pay any state taxes for your retirement income. That amounts to huge savings compared to high tax states, which in some cases take over 10% of your personal income.

This is a really great one:

Florida Might Be The One

Whats the bottom line?

More than any other state, Florida seems to have gone out of its way to become the most tax-friendly state in the nation.

Click to Tweet: Florida has gone out of its way to become the most tax-friendly state in the nation

Retirees dont just move there for the sun. They also move there because it saves them a lot of money on taxes. And high net worth retirees will save even more.

In fact, we were recently working on a Wealth Management Analysis for an ultra-high net worth family planning to move to Florida. After we finished, we noticed several things that were quite amazing:

With the same investment plan, this family would make $150,000 more living in Florida compared to living in California. Just by switching their residency and making no other changes, they make an extra six figures annually in the state.

As you can see, a change of residence may be one of the easiest ways to improve the performance of your portfolio.

And if you think thats good, look at this one:

According to Business Insider, an ultra-high net worth investor making $10 million a year and who owns a $10 million home will pay $1.2 million more in taxes living in New York compared to Florida.

Every year!

See a full list of Floridas tax benefits from their state website.

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What States Have No Income Tax

In the United States, there are currently nine states that do not have a state income tax. These states are:

Alaska

The largest, and considered one of the most tax-friendly states in the United States, Alaska repealed its personal income tax in 1980. A couple of downsides of living there are the remote location and steep cost of living relative to median family incomes.

Florida

Florida, a popular vacation retreat, generates most of its revenue from state and local sales tax. Florida also has a very competitive housing market.

Nevada

Nevada generates most of its income from sales and excise tax. Generally, Nevadas state and local sales tax is on the high side.

New Hampshire

New Hampshire still taxes dividends and interest on investment income until 2027. The cost of living and property taxes in this state are among the highest in the country as well.

South Dakota

South Dakota is considered one of the most affordable states. South Dakota depends on the state and excise taxes to generate revenue.

Tennessee

Tennessee phased out its tax on interest and dividends on investment income in 2021. This state generally relies on an above-average sales tax. The overall tax burden for TN residents is the second-lowest in the country, according to U.S. News & World Report.

Texas

Texas has one of the lowest state and local tax burdens in the nation. The Lone Star State generates a good portion of revenue from one of the highest property tax rates in the country.

Washington

Wyoming

How Many States Are Tax Free In Usa

Nine states Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming have no income taxes. New Hampshire, however, taxes interest and dividends, according to the Tax Foundation. It has passed legislation to begin phasing out that tax starting in 2024 and ending in 2027.

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In Most States State And Local Tax Systems Worsen Inequality

Forty-five states have regressive tax systems that exacerbate income inequality. When tax systems rely on the lowest-income earners to pay the greatest proportion of their income in state and local taxes, gaps between the most affluent and the rest of us continue to grow.

The ITEP Tax Inequality Index measures the effects of each states tax system on income inequality by assessing the comparative impact a states tax system has on the post-tax incomes of taxpayers at different income levels. Essentially, it answers the following question: Are incomes more equal, or less equal, after state taxes than before taxes?

For example, consider this scenario: if taxpayers in the top 1 percent are left with a higher percentage of their pre-tax income to spend on their day-to-day living and to save for the future than low- and middle-income taxpayers, the tax system is regressive and receives a negative tax inequality index score. This indicates that the income inequality that existed before the levying of state and local taxes has been made worse by those taxes. On the other hand, states with slightly progressive tax structures have positive tax inequality indexes. This means that after taking state and local taxes into account incomes are no less equal than they were before taxes and tax systems in those states, at the very least, did not worsen income inequality.

FIGURE 2

NOTE: See Appendix B for detailed ITEP Tax Inequality Index and Methodology for more information.

FIGURE 3

The Benefits Of Living In A State With No Income Tax Comes Down To Your Personal Finances

Whether you should move to a state with no income tax depends on your personal financial situation and your individual priorities. Families with college-aged students might not want to move to a state with no income tax if it means paying more tuition. Meanwhile, if the bulk of your household budget goes toward groceries and clothing items that are sales taxable you might not save much money in the long run. States inheritance taxes should also be taken into consideration, especially if youre nearing retirement and hoping to eventually pass down an asset while considering a move.

As the economy rebounds from the pandemic and remote work becomes increasingly more common, Americans might find that they can live and work in different places than they could before the outbreak. But if a state with no income tax has limited employment opportunities for your industry, you might want to hold off on relocating just so you can reduce much youre paying in taxes every year.

At the same time, higher-income earners might benefit from living in a state with no income tax. And if you dont own property, you might not feel a big difference in your tax burden.

You do see a trade-off when it comes to the major taxes that states levy, Loughead says. if youre a really high-income individual, youre probably going to think twice before living in a state with high income taxes, especially if theres a bordering state where you can reside in.

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The 10 Most Regressive State And Local Tax Systems

Ten states Washington, Texas, Florida, South Dakota, Nevada, Tennessee, Pennsylvania, Illinois, Oklahoma, and Wyoming are particularly regressive, with upside-down tax systems that ask the most of those with the least. These Terrible 10 states tax their poorest residents those in the bottom 20 percent of the income scale at rates up to six times higher than the wealthy. Middle-income families in these states pay a rate up to four times higher as a share of their income than the wealthiest families.

FIGURE 4

What characteristics do states with particularly regressive tax systems have in common? See Figure 4 for a look at the ten states with the most regressive tax systems. Several important factors stand out:

Retirement Account And Pension Income

The way a state handles retirement account and pension income can have a huge impact on the finances of a retiree. Many states do not provide any kind of deduction, exemption or credit on withdrawals from a retirement account such as a 401 or IRA.

How might that affect a typical retiree? Lets say your effective state tax rate in one of these states is 4% and your annual income from your 401 is $30,000. That would add up to taxes of $1,200 on that retirement account income taxes that you wouldnt have to pay in states like Alaska and Mississippi .

Exemptions for pension income are more common. Only a handful of states fully tax income from a government pension, while a few more tax income from a private employer pension. The other states either exempt that income or provide a deduction or credit against it.

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Best States To Retire In For Tax Purposes

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Many people consider relocating in retirement in order to reduce their cost of living and make their savings last longer. When weighing the pros and cons of moving to another state, its important to consider the total tax burden there, including state and local taxes on retirement income, property tax, even sales tax. Also, some areas with a lower tax burden have a higher overall cost of living, which can cancel out any savings.

There are many factors to consider when deciding where to put down roots in retirement, from climate to healthcare access. Below we look at the best states to retire in for taxes, and how to tell if moving will be worth it.

What Are Property Taxes Based On

While your homes assessed value for property taxes may match its actual value, that wont always be the case. That gap can affect your tax amount. What youll pay in property taxes ranges depending on the state and county you live in as well as the overall value of your home. That includes both the land itself and the structures on it. So, vacant land will likely have lower real estate taxes due to a lower assessed value.

Assessment is based on a unit called a mill, equal to one-thousandth of a dollar. Assessors find annual property tax liability by multiplying three values:

• the state tax rate,
• the assessment ratio ,
• and the property value.

Some of these values fluctuate according to the market and state.

States do their property assessments at different frequencies, some annually and others every couple of years.

Take the first step toward buying a house.

Get approved to see what you qualify for.

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States With Graduated Tax Rates

Graduated, or progressive, tax rates use a series of income thresholds called brackets to assess taxes.

“Progressive tax systems are more common and apply a higher tax rate to higher earners,” says Tyler Davis, a CPA with Simplify LLC, which provides free resources for small business owners. “The more you make, the higher your tax rate is.”

Here’s a simple example of how it would work in Alabama, where there are three tax brackets that start at $0, $500, and $3,000 of income, taxed at 2%, 4%, and 5%, respectively:

Under that system, someone earning $10,000 a year would pay $460 altogether in state taxes. The first $500 would be taxed at 2%, for a total of $10. The next $2,500 gets taxed at 4%, for a total of $100. And the remaining $7,000 is taxed at 5%, for a total of $350. Each chunk of income is taxed at progressively higher rates as the total income climbs higher up the scale.

The argument for graduated tax rates is that they’re tied to your income so those who earn more pay more. A flat tax, on the other hand, can have a disproportionate impact on low-income taxpayers.

States To Avoid When Retiring

Choosing the best state to retire in sometimes means making compromises. If safety and healthcare access are top priorities, for instance, you may not get your ideal weather. But for many retirees, a high cost of living is a deal-breaker.

Here are the 10 states with the highest annual cost of living for retirees:

1. Hawaii: $99,170

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Income Tax Provisions That Benefit Low

A key tool that states have available to enhance income tax fairness and lift individuals up and out of poverty are low-income tax credits. These credits are most effective when they are refundable that is, they allow a taxpayer to have a negative income tax liability which offsets the regressive nature of sales and property taxes and are adjusted for inflation so they do not erode over time.

Twenty-nine states and the District of Columbia have enacted state Earned Income Tax Credits . Most states allow taxpayers to calculate their EITC as a percentage of the federal credit. Doing so makes the credit easy for state taxpayers to claim and straightforward for state tax administrators.

Refundability is a vital component of state EITCs to ensure that workers and their families get the full benefit of the credit. Refundable credits do not depend on the amount of income taxes paid rather, if the credit exceeds income tax liability, the taxpayer receives the excess as a refund. Thus, refundable credits usefully offset regressive sales and property taxes and can provide a much-needed income boost to help families pay for basic necessities. In all but five states , the EITC is fully refundable. The use of low-income tax credits such as the EITC is an important indicator of tax progressivity: only two of the ten most regressive state income taxes have a permanent EITC, while all of the ten relatively progressive state income taxes provide a permanent EITC.

What About States Without Income Taxes

Not levying a personal income tax requires tradeoffs that are often detrimental to tax fairness. It is a common misconception that states without personal income taxes are low tax. In reality, to compensate for lack of income tax revenues these state governments often rely more heavily on sales and excise taxes that disproportionately impact lower-income families. As a result, while the nine states without broad-based personal income taxes are universally low tax for households earning large incomes, these states tend to be higher tax for the poor.

FIGURE 8

Note: The nine states without broad-based personal income taxes are Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. Tennessee levies a limited personal income tax that only applies to interest and dividend income it is set to expire in 2021.

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Expert Insights: Moving And Taxes

Making the move to a different state is a big step, and from a tax perspective, it can get complicated. MoneyGeek interviewed several experts to elaborate on the unique tax issues that moving presents and what you may need to take into account if you’re thinking about making a move across state lines. The views expressed are the opinions and insights of the individual contributors.

States With No Income Tax

The table below illustrates the differences among states with no income tax. The first two columns show the states total tax burden as a percentage of personal income followed by the rank that the state holds among all 50 states.

The third column shows the states affordability ranking, which combines both the cost of housing and cost of living, and the last column includes the states rank on the U.S. News& World Report Best States to Live In list.

These figures are as of the most recent reports: 2021 for overall tax burden, 2020 and 2019 for affordability, and 2021 for Best States to Live In.

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