Taxes are an unavoidable part of our lives. And it’s a relief to know that there are states where you don’t have to pay for it. Yes, some states don’t require their residents to pay income tax. And they have reasons for it. But is it an all-good thing? Currently, the states with no income tax are:
- South Dakota
- New Hampshire
New Hampshire will no longer tax the wages of their residents but will tax their investment earnings, like dividends and capital gains. While in Tennessee, they will no longer tax the investment earnings of their residents, as well as their wages. This change just started this year.
These nine states with no state tax chose to eliminate the burden on their residents, especially retirees who have started collecting Social Security. Imagine keeping every hard-earned dollar you make, with no portion going to the state. Such a win!
If you are a U.S. citizen, you know you are responsible and must pay the federal income tax and fulfill a separate state income tax obligation. Living in one of the above states is a way to attain a lower tax bill.
This article will discuss the benefits of living in these nine no income tax states, uncovering their advantages and challenges. And we’ll delve into the implications for residents living in states without income tax.
Residing in a state with no income tax can significantly enhance your financial well-being.
The Federal Income tax brackets for 2023 range from 10% to 37%, depending on your annual income. If you are one of the highest earners living in California, the state taxes their residents 13%. That shows if you reside there, 50% of your income goes to taxes only.
The more you earn and the higher the tax rate in your state, the more you can save by moving to a state with no income tax.
That’s why it’s the most prominent advantage of living in states with no tax state—it boosts your take-home pay. With no state income tax deductions, you can keep a larger portion of your hard-earned income.
It’s a financial advantage that can significantly improve your quality of life and provide the freedom to pursue your financial goals. You will have more money to save, invest, or spend on things that matter to you.
While you might escape the income tax burden, it’s essential to consider that other taxes could be higher in these regions. These no income tax states look elsewhere to fund essential services, which could translate to higher sales tax, property tax, or excise tax such as taxes on fuel, tobacco, alcohol, and other goods.
Here are some notable facts from D.C. based think tank Tax Foundation:
- Tennessee boasts the nation’s highest combined sales tax rate at 9.53%
- In Washington state, gasoline taxes are among the highest in the nation
- New Hampshire and Alaska rely the most on property taxes, with tax collections accounting for 67.6% and 51.8%, respectively, of their revenue.
Pump prices in Washington are also among the country’s highest, partly because of an increased gasoline tax. According to The Energy Information Administration, Washington charges 49.4 cents per gallon in gas taxes and fees, the third-highest in the country behind Pennsylvania and California.
A 2021 analysis by the U.S. Census Bureau revealed that South Dakota and Wyoming spent the least amount on education of all 50 states. Having no state income tax means lower revenue for individual states, resulting in lower spending on basic services.
Residents of these states need to weigh the trade-offs. Living in a state with no income tax can undoubtedly put more money in your pocket, but it’s crucial to evaluate how the state compensates for this loss of revenue through other taxes.
Each state’s financial structure is unique, so understanding the entire tax landscape is vital to making informed financial decisions when choosing where to live.
An analysis by the Tax Foundation reveals that no income tax states experienced twice the national growth rate over the past decade. During that same period, the gross state product in those locations grew 56% faster.
The U.S. News released the rank for best states based on various things such as health care, education, the state’s economy, public safety, and the natural environment. The good news is that states without income tax, like New Hampshire, Florida, Texas, and Tennessee, are in the top 12 for having solid economies.
Final Thoughts About Living in a No Income Tax State
Whether or not you choose a state with no income tax as your residence, one truth remains constant: the decision is ultimately based on your financial situation.
The benefits and trade-offs of living in one of these states are deeply intertwined with the specifics of your finances, goals, and lifestyle.
While residing in a state with no income tax might initially seem like a path to growing your savings, it can create a different tax landscape where you’ll encounter higher sales taxes on everyday essentials like groceries and clothing. You will realize you might not save much money for the future in the long run. Considering this shift in taxation is important when evaluating the overall financial impact of living in such a state.
Due to the pandemic’s impact, Americans may have discovered newfound flexibility in choosing their living and work locations. However, if a no income tax state offers limited employment prospects in your industry, it’s wise to consider delaying relocation to minimize your annual tax burden.
Ultimately, the decision to live in a location that does not tax their resident’s income should be well informed. It’s a choice that involves financial considerations, lifestyle preferences, and future goals.
The key takeaway is this: your financial well-being is a deeply personal matter, and the benefits of living in a state with no income tax or otherwise depend on how they align with your unique financial picture and aspirations.
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Tammy is a journalist and creative content writer with over 10 years of experience. Driven by curiosity, her work explores how digital marketing, SaaS, and varied creative pursuits intersect with everyday life.She focuses on creative storytelling and tackles how the search for a more meaningful life is changing the way we work.Tammy will meow at all stray cats, and won't start the day without an iced Spanish latte.