The idea of keeping a larger amount of take-home pay while living in a tax-friendly environment may entice some. But what are the subsequent tax implications of not having state-wide income tax? In this article, we’ll explore the most commonly asked questions about states with no income tax, providing a guide to understanding the benefits and factors to consider before you decide to move.
Which states are tax-free?
Technically no states are completely tax-free. But there are nine states that don’t collect income tax.
- South Dakota
There are two additional states that do not tax your regular income, but they do tax your interest and dividends
- New Hampshire
In the United States, each state has the authority to determine the tax structure they will use to fund their government services and operations. Most U.S. states will require residents to file an individual state tax return even if they don’’t have income tax.
Learn more: An Overview of State and Local Income Taxes
How does living in a state without income tax affect my take-home pay and tax burden?
Depending on your state, living somewhere without state-wide income tax could benefit you financially. When you live in a state with no income tax, you typically have a higher take-home pay compared to taxpayers living in states with income tax.
The amount of income that would otherwise be deducted from your paycheck as a withholding throughout the year instead goes directly to you.
This addition to your take-home pay may offer you more flexibility in the spending of your discretionary income so you can prioritize your financial goals – whether that’s building your savings, making investments, or paying personal expenses. Because states with no income tax primarily tax consumable items like food, clothing, and gas, this tax structure could allow you to minimize your overall tax burden.
What are the drawbacks of living in a state with no income tax?
While living in a state without income tax can be beneficial, it’s essential to consider the potential trade-offs. One of the significant trade-offs is that states with no income tax often rely on other forms of taxation to raise revenue, such as sales tax or property tax.
For example, Florida has a large network of toll roads that they use to gain state revenue. These alternate forms of taxation can lead to higher taxes in other areas, impacting the overall cost of living.
States may even limit the number of public services and programs typically funded through taxes. Consider states like California, which typically ranks as having one of the highest state income tax rates. However, this means that they have higher spending on public services like education, parks, roads, and public safety.
What other types of taxes exist in states with no income tax?
In states with no income tax, governments rely more on alternative forms of taxation to generate revenue. The most common types of taxes in these states include sales, property, and excise tax. While almost every state implements these alternative taxes, typically states without income tax impose these taxes at a higher rate than states with income tax.
- Sales tax is imposed on consumer purchases, covering a wide range of goods and services, and its rate varies depending on the state and local jurisdictions. If you are itemizing deductions on your federal return, consider taking the sales tax deduction.
- Property tax is levied on real estate properties and is usually used to fund local government services such as schools and public safety.
- Excise taxes are applied to specific goods like gasoline, tobacco, and alcohol, providing a source of income while also aiming to discourage excessive consumption.
It’s important to note that the impact of these taxes varies from state to state, so potential residents should assess the overall tax landscape before making any decisions.
Read also: Why Do We Get Money Back for Taxes?
Are you planning to file a state return this year? Here’s how you can file your state return for free!