Income tax can take a big bite out of your wallet and your business’s bottom line. But not every state in the union charges income tax. Some states, like Texas, have become well-known as business havens for budget-minded entrepreneurs partly because they don’t charge income tax.
For comparison, here are the nine states with the highest income tax rates:
- California – 13.30%
- Hawaii – 11.00%
- New York – 10.90%
- New Jersey – 10.75%
- Oregon – 9.90%
- Minnesota – 9.85%
- Vermont – 8.75%
- Iowa – 8.53%
- Wisconsin – 7.65%
This article will look at nine states with no income tax and explore everything taxpayers need to know about these tax-reduced territories.
What is income tax?
Income tax is a crucial source of revenue for state and federal governments worldwide. There are several types of income tax that you might have to pay depending on where you live.
An individual income tax is levied on individuals’ wages, salaries or other income. States usually impose these.
Corporate income taxes are levied against businesses and their income from business operations.
Meanwhile, state and local income taxes are other forms of income tax that states have more power over. These are distinct from federal income taxes and subject to each state’s specific tax code. Some states, such as California, impose significant income taxes, while others levy no additional income tax.
Why do some states charge income tax?
Income tax is a very reliable source of income. People have to earn money to spend money, which means that levying an income tax provides local and federal governments with enough funding to build schools, maintain roads, pay law enforcement officers and fund all other types of government operations.
Which U.S. states don’t have to pay taxes on income?
Only some states charge income tax to their citizens.
Nine states either don’t have an income tax or are set to phase out income tax shortly. These states are:
- New Hampshire — technically, New Hampshire makes tax investment and interest income, but those taxes will be gone in 2023.
- South Dakota
- Washington State — note that Washington does charge income tax for investment income and capital gains taxes, but only for those who earn a certain amount of money.
If you live in any of these states, you’ll take home more of your money from most sources of income, like your salaries and tips.
Comparing states with no income tax
Does that mean you should immediately pack your bags and try to move to one of the above states? Not necessarily. Keep reading to review each state with no income tax and compare them based on their total tax burden and other factors.
Alaska is both a cheap and expensive place to live. For instance, it has no state income tax or sales tax. The total tax burden for Alaska is 5.10% — the lowest of all 50 states. On top of that, all Alaskan residents get an annual payment from the Alaska Permanent Fund Corp.
Still, the cost of living in Alaska is higher than average because of its distance from manufacturing centers and the relative remoteness of its cities. So you can expect to pay more for things like groceries and gas.
Florida is a popular snowbird state thanks to its population of retirees and its warm temperatures. While the excise and sales taxes in Florida are higher than the national average, the total tax burden on Florida residents is 6.97%.
It does have higher-than-average housing costs, but on the plus side, Florida is a relatively cheap state to live in if you want to go to school.
Nevada’s total tax burden is 8.23%. Citizens don’t have to worry about income tax because there are high sales taxes on alcohol, gambling, purchasing groceries, buying clothes, casinos and hotels.
Then there is New Hampshire. As mentioned above, New Hampshire doesn’t charge general income tax, but it does charge income taxes on certain things. The total tax burden for New Hampshire residents hovers at around 6.84%, which is relatively low compared to other states.
New Hampshire is a relatively small state, and the cost of living can vary depending on where you live.
South Dakota has a total tax burden of 7.37% for its filers. Even though it doesn’t charge income tax, it does charge heavy taxes on things like cigarettes and alcohol.
It also charges very high sales taxes and has higher than average property tax rates, making it costly to live here if you don’t have a good source of income.
Tennessee’s total tax burden on its residents is 5.74%. Due to legislation passed in 2016, Tennessee lowered taxes for unearned income for its citizens. But this only resulted in a higher sales tax rate and the overall highest beer tax rate for any state in the union, measuring in at $1.29 per gallon.
Texas has a total tax burden of 8.19%. Most of its taxes come from excise taxes and sales taxes because the residents hate the idea of income taxes. Note that sales taxes can be up to 8.25%in certain jurisdictions.
Furthermore, property taxes in Texas are higher here than in most other states. Even with all that, there’s no denying that Texas has a relatively low tax burden compared to other conditions.
Washington has a relatively young population and an average tax burden of 8.34%. Many residents pay high sales and excise taxes, and you’ll find that gasoline prices at the pump are also higher than average.
Combine that with higher-than-average living costs and high housing costs, and it’s clear that Washington is not among the most affordable states, even if it doesn’t charge income tax (for most).
Lastly, Wyoming is a very unpopulated state. It charges a total tax burden of 6.14% on its citizens, which includes excise, sales, (some) income and property taxes.
While Wyoming might be cheap, keep in mind that it’s only suitable for those who are fans of the frontier lifestyle. This empty state has little going on in terms of metropolitan areas or tourist attractions besides national parks.
Should you move to a state with no income tax?
Moving to a state with no income tax is an attractive prospect. No one likes getting a check from their work only to see what the government takes to pay for necessary services.
While you might rationally understand the purpose of income taxes, you might instinctively feel despondent to see your hard-earned money taken away right as you get it.
But while it can be tempting to move to a state with no income tax, you should consider the total tax burden each state levies on its residents before proceeding. You should also consider what each state has to offer.
For example, many people move to California, which is widely understood to be one of the most expensive states to live in. Why? It’s a beautiful state, with lots to do and job opportunities, particularly in the entertainment and tech industries.
Similar states, like New York, Hawaii or Minnesota, might have high federal income tax rates for all taxable income and additional taxes to boot but counteract that with low local sales tax rates.
In contrast, Wyoming might place a low tax burden on its residents. But you must have a job in farming, ranching or mining. There isn’t much to see and do in Wyoming if you aren’t a fan of the great outdoors.
Then you have to keep business taxes in mind. Self-employed individuals might find some states better than others regarding the final tax bill or their state sales tax brackets.
Factors like healthcare, pensions and dividend income can make states like Alabama, New Jersey, Illinois and others throughout the United States attractive places to live and work.
Therefore, don’t immediately pick one of these states and move just because it doesn’t have personal income tax on your earned income. Income taxes are valuable and vital for the government, and in many cases, they can help to fund some of the most enjoyable and profitable parts of state economies.
What’s the bottom line on states with no income tax?
There are plenty of states you can move to throughout the US without an income tax. These might be ideal states to move to in the future or states in which to start a business.
But remember that these no-income tax states have advantages and disadvantages; consider the total tax burden imposed on you and future businesses in each state before setting out for “greener” pastures.
Looking for more helpful articles to expand your financial knowledge? Check out Entrepreneur’s Money & Finance resources here.