7 States With No Income Tax
The Tax Bite in States Without an Income Tax—Are You Really Better Off?
The Internal Revenue Service isn't the only tax entity holding its hand out for a piece of your paycheck. Most states—41 in all—impose a broad-based individual income tax. Only seven lack an income tax altogether: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming.
Tennessee and New Hampshire fall into a gray area. They tax dividend and interest income, but not earned income.
Tennessee Will Become the 8th Tax-Free State
Tennessee is gradually reducing its "Hall tax" on interest and dividend income. The state's 6 percent Hall tax rate is being reduced in 1 percent increments each year until the tax is completely eliminated after the 2021 tax year. It's at 3 percent as of 2018.
Alaska is the only other state to ever take legislative steps to eliminate an existing income tax.
New Hampshire's Income Tax
New Hampshire—the other state that doesn't tax earned income—only requires that residents file a tax return when they have interest and dividend income in excess of $2,400. That increases to $4,800 if they're married and filing jointly. An additional $1,200 exemption may be available for certain taxpayers who are age 65 or older, disabled, or blind.
When You Earn Income in Other States
There's a caveat, of course. If you live in a state that does levy an income tax and you earn income in one of the tax-free states, you must still report that income on your home state tax return. And it works both ways. If you live in a tax-free state and earn income in a state that does tax earnings, you must file a non-resident return in that state even though you don't live there.
Taxes on Retirement Income
Although 43 states impose some version of an income tax, 36 of them take it easy on retirees. Although the guy who's still punching a time clock might have to pay income tax, many seniors do not, at least if they stop working. Some of these states exclude all retirement income while others exempt only a portion.
Alabama, Arizona, Arkansas, California, Delaware, Georgia, Hawaii, Idaho, Illinois, Indiana, Iowa, Louisiana, Maine, Maryland, Massachusetts, Michigan, Mississippi, New Jersey, New York, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, South Carolina, Virginia, Wisconsin, and the District of Columbia do not tax Social Security income. Kansas exempts Social Security income if your adjusted gross income from all sources is $75,000 or less.
Alabama, Hawaii, Illinois, Kansas, Louisiana, Massachusetts, Michigan, Mississippi, New York and Pennsylvania do not tax government pensions, although some reserve this perk for pensions earned in their own state. You might have to pay income tax if you earned a government pension elsewhere then you moved to one of these states when you retired.
Pennsylvania also exempts private-sector pension income, and Alabama does not tax income from defined benefit retirement plans. Hawaii does not tax income from contributory retirement plans.
Will I Pay Less Taxes Overall in These States?
Before you plant a "For Sale" sign on your lawn and begin packing your bags to move to one of these tax-free states, keep in mind that they still need to raise revenue to function and they have to get that money from somewhere.
States without an income tax often make up for the lack of these revenues in other ways, such as through higher property taxes, sales taxes, fuel taxes, and other taxes. These can add up so you're paying more in overall taxation than you might in a state that does tax your income at a reasonable rate.
New Hampshire and Texas have some of the highest property taxes in the nation, although New Hampshire does not have a sales tax. Tennessee has one of the highest sales tax rates in the U.S. Washington will get you at the gas pump—its gasoline tax is exorbitant.
Many of these states also have higher-than-average costs of living. That being said, most—but not all—of them failed to make the Tax Foundation's Top 10 list of states with the lowest overall tax burdens.
It used to be that you could claim a tax deduction for state income taxes you paid if you itemized on your federal return. You can still do that...sort of.
The Tax Cuts and Jobs Act, signed into law in December 2018, caps this deduction at $10,000—and this $10,000 limit includes property taxes as well. So those who don't have to pay income tax might be able to deduct most or all of their property taxes. That $10,000 limit will stretch further.
Tax laws change periodically, and you should consult with a tax professional for the most up-to-date advice. The information contained in this article is not intended as tax advice and is not a substitute for tax advice.