What to Know About States Without Income Tax

Did you know that seven American states do not charge their residents income tax? These include Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. An additional two—New Hampshire and Tennessee—do not collect tax on wages; however, they do tax income made on investments. It is expected that New Hampshire and Tennessee will soon eliminate their tax on investment income to join the seven states without income tax by the year 2025. 

Does this mean that these nine states are the best choices for places to live in America? 

Not necessarily. Though all of these states have their pros and cons, their lack of income tax is not the best determining factor for how cheap it is to live in a state. To clarify, let’s walk through a few things to consider when thinking about living in states with no income tax.

No Income Tax Doesn’t Always Mean Less Tax

When we look at taxes, we should take into account more than just income tax. States without income tax will often find ways to make up for that money in other areas, likely in sales, excise, and property taxes.

Tennessee and Washington, for example, are both on the list of nine states without an income tax. They are also two of the states with the highest sales tax in the US. With Tennessee at 9.53% and Washington at 9.21%, these two are prime examples of how states need to find other areas in which they can make the money they need to fund their states’ operations.

Excise taxes—taxes on goods, such as tobacco and alcohol—are another way for a state to recoup money from the taxpayer. Another state on our list, Nevada, collected $993 per capita of excise tax in 2019, one of the highest in the country. 

Finally, two states on the list, New Hampshire and Texas, have two of the highest property tax rates in the country, with New Hampshire at 1.86% and Texas at 1.81%. 

Factors to Consider in Cost of Living by State

Taxes are not the only, or the most important, factor in determining the cost of living for each state. If you are considering a move, research your chosen city and state to identify how expensive the area is, especially with respect to the quality of life you strive for. 

Consider the following categories when thinking of cost-of-living rates: 

For a general, high-level look at the cost of living comparison between your current city and where you’re moving, Dave Ramsey’s Cost of Living Calculator can give you an idea of what you’ll need to spend per year.

Are you relocating? Contact us today to begin adjusting your financial strategy.

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