Out of the total 50 states in the United States, eight states - Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming have no state income tax.
In 2020, Tennessee and New Hampshire have made amendments. Thus, by 2024, a total of 9 U.S. states will have no state income tax.
Tennessee used to tax investment income and interest but it was fully revoked on January 1, 2021.
New Hampshire currently taxes investment income and interest but is being phased out by 1% per year over a 5 year period.
Should You Move to States With No Income Tax?
It may seem ideal to move to states where you don't have to pay any income tax to save money.
Moving to these states after retirement can mean no tax on your social security benefits, pensions, and other sources of retirement income.
However, it may not be as simple as it seems. Here are important factors to look into before you decide to settle in one of these states.
Tax Revenue From Other Sources
States with no income tax make up for the lost revenue with other taxes including property taxes, sales taxes, fuel taxes, etc.
New Hampshire has one of the highest property tax rates in the U.S. Its revenue from property taxes in 2018 was nearly 64%. But it does not have a sales tax.
Meanwhile, Tennessee has the highest combined sales tax rate in the country at 9.55%. At a 7% sales tax rate, 60% of its tax revenue comes from sales tax.
Florida levies a sales tax rate of 6% and a combined average of 7.08%. The property tax rate is one of the highest in the country.
Washington state levies a tax of 49.4 cents per gallon on gasoline, one of the highest in the U.S.
Other reasons for states charging no income taxes could be due to increased revenue from other sources.
For instance, Alaska gets its major chunk of revenue from the oil industry in the state. Wyoming also gets significant revenue from taxes imposed on the extraction of natural resources, primarily oil.
The cost of living in the U.S is high regardless of the state. The accurate measure of how affordable a state is determined by a state's overall tax burden. The overall tax burden of a state is the percent of income paid in state and local taxes.
Even though Alaska has no state income tax and sales tax, its cost of living is very high because of its remote location.
Also, Alaska ranks 45 out of 50 in affordability rankings of the 2018 U.S. News & World Report.
However, the state's overall tax burden is only 5.16% of personal income as per WalletHub 2020 Tax Burden by State. It is the lowest of all 50 states.
Nevada has the highest overall tax burden of 8.39% among the states with no state income tax and it is at 42 ranks when it comes to affordability.
The income tax rate alone does not tell about its affordability. Higher-than-average cost of living and housing costs should also be taken into account.
Access to Services
Taxes alone can't be the deciding factor when deciding to move to a particular state. A lower tax bill could also mean reduced services.
Access to healthcare services and employment opportunities also need to be considered beforehand.
There can be a situation where states with higher taxes have better medical care or jobs.
What to Do if You Earn Income in the Other States?
There can be two scenarios.
You live in a tax-free state but earn an income in another state that levies an income tax. Or you live in a state that taxes your income but you earn income in one of the tax-free states.
In the first case, you must file a non-resident income tax return in that state even if you don't live there.
You must report your earnings from the tax-free states on your home state tax return in the second case.
Low taxes don't paint the complete picture of the living expenses and conditions of the state. Knowledge about the types of taxes you may pay in a particular state can be handy if you are tax-conscious.
You might be paying more in overall taxation in the state with no income tax than the state with an income tax.
Depending on your lifestyle and spending habits, tax payments can vary. If you don't own a property, you might not be bothered by the property tax.
It is also possible that you like the place or may want to stay close to your family regardless of the taxes. Some things do come first on your priority list.