No-Income-Tax States: The Grass Isn’t Always Greener!

Posted on Thu, Dec 16, 2021 ©2021 Drucker & Scaccetti

WalletBy: Melissa Boyce, CPA

 

In this ever-changing tax environment, some people may look to move to a state with no income tax to reduce their tax burden. As of 2021, there are eight states with no state income tax; Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming. New Hampshire does not tax earned wages but does tax investment income and interest. The taxation of investment income and interest is set to phase out starting in 2023, so by 2027 there will be nine states with no income tax. However, before you move to save taxes there are several factors to consider.

 

A state without an income tax still needs to raise revenue so they may have higher property, excise, or sales tax rates than a state with an income tax. The lack of an income tax can also lower the state’s ability to invest in social services, such as education, road maintenance, local law enforcement agencies, or healthcare. The overall cost of living in a state should also be considered.

 

To determine if you would save money moving to a no-income-tax state, look at these factors.

  • Level of income - The higher your income, the more you’ll save by not paying state income taxes. If you have taxable income of ~$215,000 or more and live in New York City and move to no income tax state, you will save between 10.726% and 14.776% when you factor in state and local tax rates. At the top end of the rate scale, this would result in significant annual tax savings.
  • Owning property - Real estate taxes are generally higher in states with no income tax and with the current limit of $10,000 on state and local income and real estate taxes for Federal itemized deductions, you might pay more for real estate taxes and get no federal tax benefit for it.
  • Purchasing habits - States without an income tax tend to have a higher sales tax. Tennessee, for example, has a 7% sales tax on all goods. Texas has a state sales tax of 6.25%, but some jurisdictions of Texas can add up to an additional 2%, making the sales tax as high as 8.25%.
  • Need for public services - If you have a family and want your children to go to public schools, you might need to forgo a move to a no income tax state. Nevada, for example, got an overall state grade of “D+” in Education Week’s 2020 Quality Counts report.

As we like to say, don’t let the tax tail wag the dog. Where you chose to live depends on a lot of personal factors and what stage of life you are in. If you are thinking about a move to help reduce your tax burden, look at all the taxes levied in those states before packing your bags.

Topics: Moving, No-tax State

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