How much does no state income tax save you? While this answer will vary for everyone, eliminating state income tax could save you thousands of dollars each year.
The exact number will depend on your income, tax bracket and current state of residence. Plus, while a state with no income tax could save you money on your tax bill, there might be a tradeoff, such as a higher state sales tax or fewer public services.
Here are some questions to answer before making a move:
- Where can I find states with no income tax?
- Would you benefit from living in an income tax-free state?
- How do I establish residency in a state with no income tax?
- How do states with no income tax get revenue?
- How much does no state income tax really save you?
There are currently eight states with no income tax, along with one other that doesn’t tax wages. Of the fifty states in the U.S., these are the states with no income tax:
- South Dakota
Additionally, New Hampshire doesn’t tax wages. It only taxes income that comes from interest or dividends.
Most income tax-free states tend to impose higher taxes on goods, services or property to make up for the fact that they don’t tax income.
Given these heightened taxes, would you save or lose money by moving to one of these states with no income tax?
Well, unfortunately not everyone would benefit from living in a state with no income tax. While you’d keep more of your income, you might spend more on other taxes. Plus, you might receive fewer or lower-quality public services.
Whether moving to another state would save you money depends on a few factors. If any of the following applies to you, then you may save money in an income tax-free state:
If you have a high income, then you’ll save a good deal of it by forgoing state income tax.
Let’s consider California, a state with a relatively high income tax. If your annual taxable income were $100,000, then you’d pay $2,581.60 plus 9.3% of your total salary amount that’s over $58,634.
All in all, you’d pay just over $6,400 in taxes to the California government. In an income tax-free state, you would get to keep that $6,400.
And even if the trade-off was a high sales tax, you may not be overly affected by it if you had a high income.
According to the Institute on Taxation and Economic Policy, low-income families pay 7.1% of their incomes on sales and excise taxes, while the top 1% pay just 0.9%.
New Hampshire and Wyoming have fairly high property taxes. In 2020 for instance, New Hampshire collected approximately $3,307 per person in property taxes, according to the Tax Foundation.
But if you don’t own much property, then you won’t be affected by high property taxes. The state will get revenue from property owners, but it won’t collect any from your salary.
Most income tax-free states have unusually high sales taxes. Tennessee, for example, charges 7% on all its goods. Therefore, a $300 Xbox becomes $321 upon purchase.
If a large portion of your salary goes towards shopping, then you may end up over-spending in one of these states. However, if you’re not a big shopper, then you should be able to save money overall.
Because these states oppose an income tax, some make do with fewer or lower quality public services. In Nevada for example, the public school system gets an overall state grade of “D+” in Education Week’s 2020 Quality Counts report.
If you have children and want to send them to public schools, then you may want to steer clear of some of these states. But if you don’t have kids or don’t rely on many public services, then you probably don’t have to worry about this reality.
Finally, opinions on state income tax often line up with people’s political leanings. Liberals might accept more income taxes in exchange for social programs, while conservatives and libertarians might oppose income taxes and want to minimize them.
So if you’re drawn to a community of like-minded individuals, then your socio-political views are another factor to consider before relocating.
Let’s say some of the above factors describe you, and you’re ready to start packing your suitcase. What steps do you need to take to embark on your new state income tax-free life?
First, you’ll need to establish yourself as a resident in one of the states with no income tax. To complete the process, you’ll need to establish both residency and domicile. The lines between residency and domicile are somewhat blurry. Residency can be more temporary, while domicile indicates your intention to stay somewhere indefinitely.
Residency and domicile laws vary by state, but they typically require you to spend a certain amount of time in the new state. Some also limit the amount of time you can spend in any other state.
If you want to claim Florida (and only Florida) residency, for instance, you can’t spend more than half the year in New York.
You’ll also need to establish an official address. To do this, you’ll have to change your voter registration, driver’s license or bank account. These records will show that you’re not just visiting; you plan to stay.
States with no income tax are relatively rare since income taxes are a major source of revenue. So how do Alaska, Washington and other income tax-free states get their money instead?
With no income tax, the seven states listed above must use other sources of revenue to pay for infrastructure and services. Several have higher sales, gas and property taxes than their income-taxing counterparts.
New Hampshire, for instance, has high property taxes, while Tennessee has the highest average combined state and local sales tax rate in the U.S. as of 2020. Wyoming is largely able to rely on its natural resources for tax revenue, while Texas and Alaska make money from the sale of oil.
And Alaska has so much petroleum revenue that it actually pays back its residents. Every year, each Alaskan resident that was a qualified applicant for the Permanent Fund Dividend amount gets a dividend check of around $1,000 to $2,000.
Some states have unique revenue sources, too. For instance, South Dakota has its ore tax and cigarette tax excises while Nevada largely relies on its gambling and tourism industry and related fees.
For many people, finding cheaper states to live in can be a smart financial move. Before signing any leases, though, you should think about where your state of choice gets its revenue.
Would you really save money there, or would you end up spending more on sales or other taxes? Consider your unique situation and how the state laws would affect your personal finances.
And if you live in one of the states that does tax income, find out how much you’re actually paying in state income taxes.
How to increase your incomeBoost your earning potential by starting a side gig or continuing your education
Rent out your car
Data science and cyber security