Whenever winter hits my home state of Massachusetts, I daydream about moving south. Sunshine and palm trees seem way more enjoyable than black ice and sub-zero wind chill.
While the weather may not be a compelling enough reason for you to move to another state, saving money on state income taxes could be.
There are seven states with no income tax whatsoever, along with two others that don’t tax wages.
So if you’re looking for cheap states to live in, then read on to learn more about states with no income tax. A few even have warm weather year-round!
Where can I find states with no income tax?
Of the fifty states in the U.S., these are the following seven states with no income tax.
- South Dakota
Additionally, New Hampshire and Tennessee don’t tax wages. They only tax income that comes from interest or dividends.
How do states with no income tax get revenue?
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 sales tax in the U.S. as of 2015. Florida also tops the list for property taxes, and Washington charges extra on goods and gasoline.
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. In 2015, each Alaskan resident that was a qualified applicant for the Permanent Fund Dividend amount got a dividend check of $2,072!
Would you benefit from living in an income tax-free state?
Except for Alaska, income tax-free states impose higher taxes on goods and services 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.
1. You have a high income
If you have a high income, then you’ll save a good deal of it by foregoing 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 $2,316.43 plus 9.3 percent of your total salary amount that’s over $52,612.
All in all, you’d pay just over $6,700 in taxes to the California government. In an income tax-free state, you would get to keep that $6,700.
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, the poorest 20 percent of Washington residents pay 16.8 percent of their annual income in sales and gas taxes. Meanwhile, the wealthiest one percent pay just 2.4 percent of their income.
If you keep your shopping to a minimum, then you can avoid paying too much of your high income on sales taxes.
2. You don’t own property
New Hampshire, Florida, and Wyoming have very high property taxes. In 2013 for instance, New Hampshire collected approximately $2,690 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.
3. You’re not a big shopper
Most income tax-free states have unusually high sales taxes. Tennessee, for example, charges seven percent 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.
4. You don’t need many public services
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 ranks last in Education Week’s 2016 Quality Counts report with an overall state grade of “D.”
If you have children and want to send them to public schools, then you may want to steer clear of some of these states. Or, 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.
5. You’re politically conservative or libertarian
Finally, opinions on state income tax often line up with people’s political leanings. Liberals tend to favor income taxes and social programs, while conservatives often oppose income taxes and want to minimize the government’s reach.
So if you’re drawn to a community of like-minded individuals, then your socio-political views are another factor to consider before relocating.
Still considering moving to another state?
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?
Before you can start your tax-reduced life, 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.
Is it really worth moving to a state with no income tax?
For many of us, 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.
Don’t forget to think about the weather, either. Even if Alaska’s yearly dividend check sounds appealing, those freezing-cold winters aren’t for everyone!
And if you live in one of the 43 states that do tax income, find out how much you’re actually paying in state income taxes. This article here can help you earn about your effective tax rate and how it affects your salary.
Also, check out this guide to learn seven smart ways to lower your income tax each year.
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