Income tax

Should you move to a state with no income tax? – Forbes Advisor

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The advantage of moving to a state with no income tax is quite simple: you don’t have to pay state income tax on the money you earn. Currently, seven states (Alaska, Florida, Nevada, South Dakota, Tennessee, Texas and Wyoming) do not levy personal income tax. Two others (New Hampshire and Washington) impose taxes only on certain types of income.

So can moving to a tax-free state help you keep more of your hard-earned money? Or will you end up paying in different ways that negate the benefit? Here’s what you need to know.

States without income tax

Most US states levy income taxes on people who live or earn money in the state. However, there are a few exceptions. As of 2022, nine states have no personal income tax or tax only certain types of investment income. These states are:

  • Alaska
  • Florida
  • Nevada
  • New Hampshire
  • South Dakota
  • Tennessee
  • Texas
  • Washington
  • Wyoming

New Hampshire Interest and Dividends levies a 5% tax on interest and dividend income. However, this tax should be phased out. The rate drops to 4% in 2024, 3% in 2025, 2% in 2026, 1% in 2027. After that, New Hampshire will repeal its interest and dividend tax entirely.

Since January 1, 2022, Washington has taxed capital gains income of high earners. The state imposes a 7% tax on the sale or exchange of long-term capital assets, such as stocks, bonds, business interests, and other investments. The tax only applies to long-term capital gains over $250,000 per year. The first payments are due no later than April 18, 2023.

Is it beneficial to move to a state with no income tax?

Yes and no. The more you earn and the higher the tax rate in your state, the more you can potentially save by moving to an income tax exempt state.

However, moving to a state with no income tax is not always advantageous. Every state needs money to fund public schools, build and maintain roads, pay state employees, and fund other projects and programs. While the state does not receive this money through state income taxes, it generally does collect it from other taxes, such as property taxes or sales taxes.

For example, let’s say you live in Massachusetts, which has a flat tax rate of 5%, and your taxable income for the year is $120,000. This would result in a tax bill of $6,000. If you moved to Florida, which has no state income tax, you could avoid this state income tax.

Read more: Even if you don’t usually do it, file a tax return this year

Here is another example, Nevada has no personal income tax. However, it has a state sales tax rate of 6.85%, which places the state 7th on the list of US states with the highest sales tax rates.

Additionally, cities and counties may add their own local sales tax to this rate. In Nevada, the average local tax adds an additional 1.38% to the state sales tax, for a combined rate of 8.23%. In Clark County, Nevada, where Las Vegas is located, the county adds an additional 1.53%, for a combined rate of 8.38%.

Nevada’s economy relies heavily on tourism, so visitors pay a large percentage of Nevada sales tax revenue. Yet, each time a Nevada resident purchases furniture, appliances, a motor vehicle, or other property, state and local sales taxes increase the final purchase price by approximately 8%.

Similarly, Texas has no state income tax. But it is one of the most expensive states to live in when it comes to property taxes. According to the Tax Foundation, Texas homeowners pay an average of 1.60% of their home’s value in property taxes. On a house valued at $300,000, that means $4,800 in property taxes per year.

Business owners may find it difficult to avoid income taxes when moving out of state. This is because most states that levy a personal income tax apply it to all income that comes from the state, whether you live there or not.

Read more: The best tax software of 2022 for the self-employed

For example, if you own a business based in California, crossing the border into Nevada will not necessarily result in a massive increase in your tax liability. California taxes all California source income. So even if you are not a resident of the state, you will need to file a non-resident tax return and pay income taxes there.

Moving to a low-tax state can cost you dearly

Of course, taxes aren’t the only factor that can affect your decision to move. If you’re moving for a new job, to be closer to family, or for a better quality of life, taxes may just be a side effect of the move.

However, if your decision to move is at least partially driven by a desire to escape high income tax bills, it’s important to compare all living costs before you jump in.

Other factors that can affect the cost of living in a state include housing, food, transportation, child care, health care, auto insurance, and utilities, to name a few. name a few.

You can use a cost of living calculator to compare overall prices between different cities and states to see how much more or less you would have to pay to live there.