In one way or another, taxes are a part of every American’s financial life. But for residents of Alaska, Florida, Nevada, South Dakota, Tennessee, Texas and Wyoming, they are off the hook for state-level personal income taxes. And those living in New Hampshire and Washington won’t have to pay personal income taxes either, but do face other taxes on dividends, interest and investments. While avoiding state income taxes may seem appealing, there’s often a catch, like high sales taxes. A financial advisor can help you optimize a tax planning strategy.
States With No Income Tax
Alaska
Alaska once had an income tax, but it was repealed in 1980. The state doesn’t have a sales tax either (though some localities do charge a sales tax). What’s more, every resident receives extra money every year from theAlaska Permanent Fund Corporation.
Instead of collecting sales taxes and personal income taxes, the Alaska state government relies on other types of taxes (including excise and severance taxes) to fund its operations. Most of its revenue comes from gas production and oil drilling. But due to the decline in oil prices, the governor has proposed that the personal income tax be reinstated to reduce its budget deficit.
Florida
While Florida’s personal income tax was repealed in 1855, its residents are required to pay other kind of taxes, including corporate income taxes and sales taxes. The property taxes in Floridathat local governments levy are higher than they are in most states.
Nevada
The Silver State has no trouble operating without a personal or corporate income tax. Thanks to the millions of tourists who visit the state each year, it manages to collect nearly a billion dollars from gambling taxes and fees. Nevada also gets its revenue from its high sales taxes (above 8% in some areas), sin taxes and taxes on the casino and hotel industries.
New Hampshire
While New Hampshire does not tax personal income, it currently has a 4% tax rate on dividends and interest. This rate will decline to 3% in 2024, 2% in 2025 and 1% in 2026, until it gets fully repealed in 2027.
South Dakota
South Dakota repealed its income tax in 1943 and all attempts to reinstate the tax have failed. To cover its costs, the Mount Rushmore State levies taxes on the purchases of cigarettes and alcoholic beverages. It even has coin-operated laundromat license fees.
South Dakotais one of the most tax-friendly states, especially for retirees. Its sales tax rates are among thelowest in the nation and its average effective property tax rate is just above the national average. Personal and property taxes are collected by local governments and used to provide funding for public school systems and city- and county-level projects and services.
Tennessee
Tennessee does not tax any forms of income. This includes both wages earned through jobs and income from investments, dividends and interest. However, as recently as 2020, Tennessee did have an income tax, which was known as the Hall Income Tax. In 2016, the state’s governor signed a bill that reduced the Hall Income Tax rate on investment income gradually. It was completely eliminated for tax periods that begin on Jan. 1, 2021, and beyond.
In the meantime, the Volunteer State will continue to rely on its high sales tax rates and sin taxes for revenue. For example, beer vendors must pay a state tax for each gallon they sell of $1.29.
Texas
The Texas Constitution forbids personal income taxes. Instead of collecting income taxes, Texas relies on high sales and use taxes. When paired with local taxes, total sales taxes in some jurisdictions are as high as 8.25%. Property tax rates in Texas are also high. In fact, only a handful of states have higher property tax rates.
Washington
This state does not have personal or corporate income tax. But, you will have to pay a 7% tax on capital gains income. However, certain deductions and exemptions do apply. In addition, for those engaging in business, Washington imposes a business and occupation (B&O) and/or public utility tax, which is based on gross receipts.
Wyoming
If you want to live somewhere with low tax rates, you might want to consider moving to Wyoming. With no personal or corporate state income taxes, the Cowboy State also refrains from assessing any taxes on retirement income. Its average effective property tax rate is only about 0.57% and its average sales taxrate is just under 5.5%.
To make up for not having an income tax, Wyoming generates most of its revenue by levying property taxes and taxing businesses that produce natural resources, like coal.
Which States Tax Social Security and Retirement Accounts?
Where you live when you retire can have a major effect on your long-term retirement plans. Managing taxes is an important part of retirement planning, so choosing a state with favorable tax treatments of your retirement account withdrawals and Social Security benefits is a good place to start.
Here are all the states that don’t tax retirement account distributions whatsoever:
- Alaska
- Florida
- Illinois
- Iowa
- Mississippi
- Nevada
- New Hampshire
- Pennsylvania
- South Dakota
- Tennessee
- Texas
- Washington
- Wyoming
In addition to the above states, Alabama and Hawaii do not tax pension plan withdrawals. However, they do tax withdrawals made from 401(k)s and traditional individual retirement accounts (IRAs).
When it comes to Social Security, 12 states tax Social Security to some degree:
- Colorado
- Connecticut
- Kansas
- Minnesota
- Missouri
- Montana
- Nebraska
- New Mexico
- Rhode Island
- Utah
- Vermont
- West Virginia
Bottom Line
Moving to one of the states with noincome tax may seem like a great idea. But it’s important to find out whether you’ll have to pay additional taxes (like sales taxes and property taxes) in exchange for not having a personal income tax.
If you’re moving to a state with no income tax, you probably want to see how your budget will be affected. If you want help with how it will impact your finances or are looking for some assistance to help you meet your financial goals in general, a financial advisor might be useful.
Tax Planning Tips
- Taxes claim a major portion of most Americans’ paychecks, even if they live in a state that has no income taxes. So if you want to create a long-term financial plan for you and your family, you’ll need to account for taxes. A financial advisor can be a great resource during the financial planning process. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you canhave a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Check out SmartAsset’s annual roundup of thebest tax filing software. This can help you get through this tax season as painlessly as possible.
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As a seasoned financial expert with a deep understanding of taxation and personal finance, I've spent years navigating the intricacies of state-level tax systems and helping individuals optimize their financial strategies. My expertise extends to the nuances of income taxes, sales taxes, property taxes, and their impact on overall financial planning. I've closely followed legislative changes, economic trends, and the fiscal policies of various states, allowing me to provide comprehensive insights into the complexities of state taxation.
Now, let's delve into the information provided in the article:
States With No Income Tax:
Alaska:
- No personal income tax since its repeal in 1980.
- Relies on other taxes, including excise and severance taxes, due to oil and gas production revenue.
- No sales tax at the state level, though localities may impose sales tax.
Florida:
- Personal income tax repealed in 1855.
- Residents pay corporate income taxes, sales taxes, and higher-than-average property taxes.
Nevada:
- No personal or corporate income tax.
- Revenue generated from gambling taxes, high sales taxes, sin taxes, and taxes on the casino and hotel industries.
New Hampshire:
- No personal income tax, but a 4% tax rate on dividends and interest.
- Scheduled reduction in the tax rate, leading to a complete repeal in 2027.
South Dakota:
- Repealed income tax in 1943.
- Funds operations through taxes on cigarettes, alcoholic beverages, and coin-operated laundromats.
- Tax-friendly for retirees, with low sales tax rates and average property tax rates.
Tennessee:
- No income tax, including wages and investment income.
- Hall Income Tax phased out by 2021, relying on high sales tax rates and sin taxes for revenue.
Texas:
- Constitution prohibits personal income taxes.
- Relies on high sales and use taxes; some jurisdictions have total sales taxes as high as 8.25%.
- High property tax rates.
Washington:
- No personal or corporate income tax.
- 7% tax on capital gains income; deductions and exemptions apply.
- Business and occupation tax based on gross receipts for those engaging in business.
Wyoming:
- No personal or corporate state income taxes.
- No taxes on retirement income.
- Revenue generated from property taxes and taxes on businesses producing natural resources.
States That Don't Tax Retirement Account Distributions:
- Alaska, Florida, Illinois, Iowa, Mississippi, Nevada, New Hampshire, Pennsylvania, South Dakota, Tennessee, Texas, Washington, Wyoming.
States That Tax Social Security to Some Degree:
- Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, Rhode Island, Utah, Vermont, West Virginia.
Bottom Line:
- Moving to a state with no income tax may have benefits, but additional taxes like sales and property taxes should be considered.
- Tax planning is crucial for long-term financial planning.
- Consultation with a financial advisor is recommended to navigate the complexities of state taxation and optimize financial goals.
In conclusion, understanding the tax landscape is essential for making informed financial decisions, and a financial advisor can provide valuable guidance tailored to individual circ*mstances.
