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9 US States With No Income Tax

9 US States With No Income Tax
Ines Zemelman, EA
16 March 2022

There are a handful of states with low state tax or without an income tax, and a couple of others that only tax dividends and interest. Of course, these states must still fund government programs, so they raise the money using fees, property taxes, sales taxes, and various other sources of income. Depending on the details of your individual situation, it may be worth considering a move to one of these states to help stretch your retirement dollars.

The details below are based on data from the states and 2018 data from the Tax Foundation. This article will help you to find out U.S. states without income tax and low property tax and also states without corporate income tax.

Alaska

Assuming your only consideration is money, Alaska takes first place as the clear winner. But, if the remote nature of the state and the harsh winters bother you, look further down the list for other options. Its remote location can make the state a more expensive place to live and boasts one of the highest corporate income tax rates in the country (9.4 percent).Tax Foundation data shows the average local and state tax per capita came in at $7,555, which is 18th lowest among all the states. In addition, senior citizens are given a property tax exemption on $150,000 of property value.

Alaska funds the government using gas and oil royalties. Along with low taxes, full-year Alaskan residents get an annual payment from Alaska’s Permanent Fund that distributes dividends based on these royalties.

This fund has distributed $1,100 annually, on average, over the previous five years. As Alaskan production has dropped, so have the royalties, but that is still a significant amount of money for just living in Alaska. If this average royalty is subtracted from average tax paid, the result is $2,200 per capita, making it the lowest tax bill in the nation.

Florida

Florida is one among the 7 states without personal income tax. When you think of a state for retirees, Florida often tops the list. While weather is a significant factor, so too is the fact that Florida repealed the income tax in 1855. Florida generates funds using property taxes and state sales tax (6%). The 2017 per-capita average tax paid came in at $3,322, placing Florida in 24th place among the states.

Nevada

The main draw to Nevada has been gambling, but the tourism industry is growing with an increase in conventions, shows, retail, and nightclubs. With no corporate or individual income taxes, both residents and businesses are drawn to the state. But, Nevada does have a unique business tax of 1.17% of wages paid.

Like many tourist states, Nevada generates revenue through sales taxes, which account for 72% of state revenue. Nevada ranks 15th lowest for local and state tax paid per-capita at $3,221.

South Dakota

This state’s economy relies heavily on tourism and farming. The state boasts Wall Drug, many national parks, the Sturgis Motorcycle Rally, and historic Deadwood.

The state is funded using sales tax (4.5%) and use taxes. These taxes accounted for 71% of revenue in 2013. Perhaps because of the motorcycle rally, the state’s second-largest source of income is fuel tax. South Dakota ranked 7th lowest of the states for taxes paid, at $3,052. The Tax Foundation estimates that South Dakota’s actual sales tax rate — when combined with other local and municipal levies — averages out to be 6.4 percent.

Texas

The state of Texas is funded through several sources - sales tax (6.25%), motor vehicle taxes, tax on fuel, and royalties and taxes on gas and oil production. Its local jurisdictions can levy up to 1.94 percent in additional taxes, for a combined rate of 8.19 percent, the 14th highest in the country. Texas has the sixth-highest property tax rate of 1.6 percent. There is no income tax on corporations. In 2011, Texas ranked the 8th lowest for taxes at $3,088 per capita.

Washington

The state of Washington has a somewhat unique system of taxes. Although there is no income tax, several other taxes add up. There is a sales tax of 6.5%, which doesn’t sound too bad, but local sales taxes added on top of this can raise the rate to 9.5% for some areas. Although there is not an income tax on corporations, there is gross receipts tax on businesses. This means that regardless of profitability, companies owe tax. This all sums up to make Washington 12th highest for taxes, at $4,366.

Wyoming

Sales tax in Wyoming is a mer 4%, but the rate for property taxes comes in at 9.5%. These taxes, along with taxes on natural resources, fund the state. Per-capita tax paid in 2011 came in at $3,500 - giving Wyoming a rank of 22nd lowest. Wyoming levies no corporate income tax.

States with Almost No Income Taxes

Tennessee

Tennessee residents don’t have to pay state taxes on their wages. The Volunteer State used to tax dividends and interest in a levy known as the “Hall Tax,” but that was officially phased out in 2021 for the 2022 tax year. However, Tennessee has the second highest state and local sales tax rate in the country at 9.55 percent.

New Hampshire

Similarly to Tennessee, New Hampshire does not tax earned income, although there is a tax of 5% on dividends and interest income that exceeds $2,400 per individual annually, or $4,800 for joint filers. There is no sales tax, although a corporate tax of 8.5% and significant property taxes add up. Some exemptions are available for elderly, blind and disabled residents. New Hampshire ranks 22nd highest at $3,769 per capita.

Should you move to a state with no income tax?

If you are moving between states permanently, it is always better to know where is the lowest taxes in USA. But there is more to the issue than just income taxes when making a decision about where to retire. It is a good place to start. If you reside abroad and need to receive mail in the US, look into a virtual mailbox. For reasons on why you may want one - please see this article - virtual mailbox and why you should have one. There are nine states without income tax. If you’re trying to determine whether moving to a state with no income tax is financially worth it, start by taking a look at your most recent tax returns. Calculate how much you paid in state income taxes (some states have a flat rate, while others have a graduated-rate) and determine your individual income tax rate. Then, compare that total with what you would be paying in the state where you wish to move. But those calculations should be the tip of the iceberg. Compare the property tax and sales tax rates of both locations, along with cost-of-living considerations, such as housing and food.

States without taxes on retirement income

Retirement plans provide multiple tax benefits. The following states are exempt from income taxes on pension income:

  1. Alaska
  2. Florida
  3. Nevada
  4. South Dakota
  5. Tennessee
  6. Texas
  7. Washington
  8. Wyoming
  9. New Hampshire
  10.  Alabama
  11.  Illinois
  12.  Hawaii
  13.  Mississippi
  14.  Pennsylvania

States That Won’t Tax Your 401(k), IRA, or Pension Distributions

The following are the states without income tax on retirement benefits

  1. Illinois
  2. Mississippi
  3. Pennsylvania
Ines Zemelman, EA
Founder of TFX