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What are the 9 States Without Income Tax and How Do They Impact Your Finances?

9 States With No Income Tax: Exploring Tax-Friendly Options

We all strive for a lower tax bill, and one way to achieve that goal is by living in a state with no income tax. Currently, seven states - Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, and Wyoming - do not levy any state income tax whatsoever. Washington state, while imposing an income tax on investment income and capital gains, applies it only to certain high earners.

However, the tax landscape in these states can be complex, and choosing where to live involves more than just looking at income tax rates. Let's delve into the details and explore the tax policies of these states to help you make an informed decision about your financial future.

1. Alaska: The Last Frontier

  • Total Tax Burden: 5.10%
  • Affordability Rank: 47 out of 50
  • Best States to Live In Rank: 45 out of 50

Alaska is a unique state when it comes to taxes. It boasts no state income tax and no sales tax, although some localities do impose a sales tax. The state relies heavily on revenue from oil production and mineral lease rentals. Alaskans even receive an annual payment from the Alaska Permanent Fund Corporation, with a 2021 payout of $1,114 per resident. However, Alaska's high cost of living, including healthcare and education, can offset its tax advantages.

2. Florida: The Sunshine State

  • Total Tax Burden: 6.97%
  • Affordability Rank: 31 out of 50
  • Best States to Live In Rank: 10

Florida is a popular destination for retirees, thanks to its warm climate and lack of a state income tax. While the state doesn't tax income, it compensates with above-average property taxes and sales taxes. Education spending is comparatively low, and infrastructure, according to ASCE, received a grade of C in 2021.

3. Nevada: The Silver State

  • Total Tax Burden: 8.23%
  • Affordability Rank: 41 out of 50
  • Best States to Live In Rank: 37

Nevada's tax revenue relies heavily on sales taxes, gambling, and sin taxes. While it has no state income tax, its high cost of living and property costs can impact affordability. Education spending and infrastructure rankings are also middling.

4. South Dakota: The Mount Rushmore State

  • Total Tax Burden: 7.37%
  • Affordability Rank: 14 out of 50
  • Best States to Live In Rank: 15

South Dakota eliminated its income tax in 1943 and finances itself with taxes on cigarettes, alcohol, and other sources. It boasts low property taxes, making it an attractive option for retirees. However, its infrastructure is in need of improvement, with 17% of bridges rated structurally deficient.

5. Texas: The Lone Star State

  • Total Tax Burden: 8.19%
  • Affordability Rank: 22 out of 50
  • Best States to Live In Rank: 31

Texas has a deep aversion to personal income taxes enshrined in its constitution. Instead, it relies on sales and excise taxes, which can reach as high as 8.25% in some areas. Property taxes are also above average, affecting homeowners. Texas spends less on education and infrastructure, and healthcare spending is below the national average.

6. Washington: The Evergreen State

  • Total Tax Burden: 8.34%
  • Affordability Rank: 44 out of 50
  • Best States to Live In Rank: 1

Washington doesn't have personal or corporate income taxes, but it does impose a 7% tax on capital gains for high earners. Sales and excise taxes are higher than average. Despite its affordability challenges, it was ranked the best state to live in for 2021 by U.S. News & World Report.

7. Wyoming: The Cowboy State

  • Total Tax Burden: 6.14%
  • Affordability Rank: 33 out of 50
  • Best States to Live In Rank: 35

With no personal or corporate income taxes, Wyoming relies on property taxes and taxes on natural resources, primarily oil, for revenue. Its healthcare spending is moderate, and its infrastructure faces challenges, with 6.9% of bridges structurally deficient.

8. Tennessee: The Volunteer State

  • Total Tax Burden: 5.74%
  • Affordability Rank: 17 out of 50
  • Best States to Live In Rank: 29

Tennessee phased out its income tax on investment income, including most interest and dividends, by January 1, 2021. It has the highest beer tax in the country at $1.29 per gallon. Education spending is average, and its infrastructure received a C grade from ASCE.

9. New Hampshire: The Granite State

  • Total Tax Burden: 6.84%
  • Affordability Rank: 38 out of 50
  • Best States to Live In Rank: 4

New Hampshire doesn't tax earned income but taxes dividends and interest. It's set to phase out the investment income tax by 2027. The state has no sales tax but levies excise taxes and has high property taxes. Education spending is high, but its school funding distribution earned a D in 2015 from the Education Law Center.

While living in a state with no income tax might seem like a financial win, it's crucial to consider the broader tax landscape and overall cost of living. Other factors, including property taxes, sales taxes, healthcare costs, and infrastructure quality, can significantly impact your financial well-being in any state. Therefore, carefully evaluate your priorities and financial situation before making a move based solely on income tax considerations.

Choosing where to live involves a complex interplay of income tax policies, property taxes, sales taxes, affordability, and the availability of essential services. While states with no income tax may initially appear attractive, it's essential to weigh the pros and cons carefully. Consider your overall financial situation, including factors like property taxes, sales taxes, healthcare costs, and infrastructure quality, to make an informed decision about where to call home. Remember, taxes are just one piece of the puzzle in your financial well-being.

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