Living in a state with no income tax is one strategy for lowering your overall tax burden.
As of 2021, eight states — Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington and Wyoming — do not levy a state income tax. A ninth state, New Hampshire, does not tax earned income, but it does impose a 5% tax on dividends and interest. This is set to expire in 2027.
Here’s a breakdown of what it means to live in a state without income tax, what benefits you might enjoy and what drawbacks you could expect. Plus, see a quick head-to-head analysis of how these nine states with no income tax match up regarding other taxes and living costs.
What does it mean to live in a state with no income tax?
At the most basic level, living in a state with no personal income tax means that you’ll get to keep a little bit more of your paycheck. And if you’re currently living in a state with high personal income tax rates like California (where some people might see portions of their income taxed at 13.3%), it can seem tempting to pack your bags and book a one-way ticket to Washington. However, moving to a state without an income tax does not mean that you will be excused from paying other taxes. If you meet the income qualifications for filing a federal return, you’ll still be expected to do so by the tax-filing deadline.
» MORE: See what federal tax bracket you’re in
Pros and cons of living in a state without income tax
Retirement benefits
Most people can expect to pay at least some taxes during retirement — whether on 401(k) distributions, pensions or Social Security benefits. However, residents of states without personal income tax generally get to skip paying state taxes on retirement plans, which can mean more money for your golden years.
Avoiding additional taxes can be a nice retirement perk, but make sure you weigh the tax benefits of moving against other important financial (and personal) considerations. For example, some states have fewer options for public transportation, less affordable health care, higher property taxes or minimal funding for senior care programs. You might also not wish to live far away from friends or close family.
» MORE: Other ways to lower your taxes in retirement
Other taxes
State taxes are often used to generate revenue for services such as health care or to fund infrastructure. Without this revenue stream, some states end up relying more heavily on other taxes, such as property or sales, to recoup the loss. So if you're a homeowner who currently lives in a state with relatively affordable property taxes, it may not be worth giving that up. And, importantly, living in a state with no income tax also means you might not be able to take full advantage of the state and local tax deduction if you itemize on your federal return.
On the plus side, except for New Hampshire, living in an income-tax-free state does mean that any capital gains you earn are protected from state taxes. This means that you’ll be liable only for any capital gains taxes on the federal level, which are calculated based on how long you held the asset before selling it.
» MORE: Explore other ways of lowering your capital gains burden
Establishing domicile
Several conditions need to be met to reap the benefits of living in an income-tax-free state. Establishing domicile, or the intention of making a state your permanent home, is the most critical one. Rules and requirements vary from state to state, but generally, you must live in a place for at least half of the year, 183 days, to begin qualifying as a permanent resident. In addition, states conduct residency audits, so this will require proof.
Tread carefully here. People who live in one location (say, New York) but spend a good part of the year in another state (say, North Carolina) could be considered a permanent resident of one state and a “statutory resident” of the other for tax purposes. This means they could end up paying taxes on earned income in both states. Tax planning with a professional is one of the best ways to avoid finding yourself in a sticky tax situation.
» MORE: What is dual residency and what are the tax implications?
Cost (and quality) of living
Perhaps the most critical number to crunch is your cost of living. This includes tallying up the costs of housing (rental or purchase), food, wages, health care and lifestyle. The savings you gain on state taxes might not be worth the extra cost incurred to live comfortably in another state. For example, someone currently residing in Buffalo, New York, on a $55,000 salary would need to earn over $70,000 to maintain their standard of living in Anchorage, Alaska.* That’s an extra $15,000 you’ll have to earn to account for higher housing, food, transportation, and health care costs.
Think about your job as well. Remote work is expanding, making it easier than ever to envision moving without risking job security. But if you were to live in a state with limited opportunities in your particular industry and something disrupted your employment, you could face difficulties securing another job.
*This hypothetical example was derived using our cost of living calculator. Prices and calculations will fluctuate based on inflation, among other factors.
» MORE: Thinking about a move? Compare the cost of living in two cities using our cost of living calculator
How the 9 states with no income tax stack up
Alaska
America’s largest state is also considered one of the most tax-friendly. When Alaska repealed its personal income tax in 1980, it began to tax companies involved in oil and gas production at high rates to generate revenue. The state’s mean effective property rate is 0.98%, and Alaska’s overall state and local tax burden is 5.8%, the lowest in the nation. On the downside, Alaska is remote — and expensive in other ways. U.S. News & World Report ranks Alaska an overall 47 out of 50 on its affordability list, making it the fourth-lowest ranking state in the country. Contributing factors include higher-than-average housing costs and a steep cost of living relative to median family incomes. Most residents can receive an annual stipend, the Alaska Permanent Fund Dividend, of up to $2,000, which might help offset some costs.
Florida
This southern state is a popular retreat for vacationers and retirees alike. Florida generates most of its revenue from state and local sales tax and tuition through state universities. This makes for an overall state and local tax burden of 8.8%. While cost of living might not be a deal-breaker for most people, Floridians may still have to contend with a competitive housing market and prices. U.S. News & World Report ranks the state at 41 out of 50 for housing affordability.
Nevada
Nevada’s overall state and local tax burden is 9.7%, which is on the high side. Most of the tax burden is driven by sales and excise tax, including groceries and alcohol, and taxes on hospitality and tourism-heavy industries such as hotels and gaming. Nevada is routinely ranked at the lower end of the scale when it comes to affordability. U.S. News & World Report positions the state overall at 41 out of 50, with a particular nod to high housing costs. The effective property tax rate, on the other hand, is 0.56%, the ninth-lowest in the country.
New Hampshire
Unlike other states on this list, New Hampshire still taxes dividends and interest on investment income at a 5% rate. This is set to phase out by 1% each year until it reaches 0% in 2027. The state also doesn’t impose sales taxes but levies excise taxes on goods such as tobacco. According to the Tax Foundation, the overall state and local tax burden is 9.7%. New Hampshire also ranks well for housing affordability, but the cost of living and property taxes is where it falls short. The state’s mean effective property tax rate is 1.89%, making it the third-highest in the country, trailing behind Illinois (No. 2) and New Jersey.
South Dakota
South Dakota, home to Mount Rushmore and Badlands National Park, is often lauded as one of the top locations for retirees. For affordability, South Dakota stakes a claim for the highest-ranking state on this list: U.S. News & World Report ranks it at 14 out of 50 nationally for its combined housing and cost of living scores. South Dakota’s overall sales and local tax burden is 9.1%; the state depends on sales and excise taxes to generate revenue, levying taxes on items such as tobacco, motor fuel and alcohol. Homeowners might not love the effective property tax rate of 1.14%, though, which places it above many other states.
Tennessee
In 2017, Tennessee began the gradual repeal of the Hall Income Tax, which taxed interest and dividends on investment income. The phaseout played out over several years, leading up to its complete elimination in 2021. According to the Tax Foundation, Tennessee does impose a relatively high sales tax, and it charges tax on items such as alcohol, beer, fuel and even fantasy sports contests. Yet, its overall tax burden is 7%, the second-lowest in the country (tied with Wyoming and bested only by Alaska). In addition, Tennessee's effective property tax rate is 0.63%. As for affordability, the Volunteer State also shines here. U.S. News & World Report ranks it an overall 17 out of 50.
Texas
Texas is the second-largest state in the U.S., and it’s widely known for its “go big or go home” attitude. In fact, Texas’ aversion to income taxes is so strong the ban is listed in the state constitution. The overall state and local tax burden is 8%, making it one of the lowest in the country, but the effective mean property tax rate, at 1.6%, is the sixth-highest in the nation. However, living in Texas has its perks outside of taxes: U.S. News & World Report ranks the state as a solid 22 out of 50 for its overall affordability and 14 out of 50 for the cost of living.
Washington
Not only does the Evergreen State not have income tax; it also doesn’t impose a corporate income tax. This incentive is no doubt appealing to the many major corporations that are headquartered in the state. Washington’s overall sales and local tax burden is 9.8%, which is relatively average. Where Washington falls short is affordability. It takes the 44th spot on U.S. News & World Report’s affordability scale, with high housing costs being the primary driver.
Wyoming
Wyoming is the least populated state in the U.S., with a total of 576,851 residents calling it home, according to 2020 Census data. The Cowboy State has an overall sales and local tax burden of 7%, the second-lowest in the nation (tied with Tennessee). Because there’s no income tax, the state relies on property, oil, sales and excise tax to generate income. Wyoming scores slightly above average when it comes to cost of living and housing — U.S. News & World Report gives it an overall affordability rank of 33 out of 50.
Note: State, local and property tax data come from tax policy nonprofit the Tax Foundation and is for the 2019 calendar year, the most recent year for available data.
Advertisement
LendingClub High-Yield Savings Member FDIC | SoFi Checking and Savings Member FDIC | Discover Bank Online Savings Member FDIC |
|---|---|---|
NerdWallet rating | NerdWallet rating | NerdWallet rating |
Learn More | Read review | Learn More |
APY4.00% With $0 min. balance for APY | APY3.75% With $0 min. balance for APY | APY3.50% With $0 min. balance for APY |
BonusN/A | Bonus$250 Earn up to $250 with direct deposit. Terms apply. | Bonus$200 Requirements to qualify |
FAQs
What 9 states have no state income tax? ›
As of 2022, Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming are the only states that do not levy a state income tax. Note that Washington does levy a state capital gains tax on certain high earners.
What are the 13 states that don t tax pensions or social security? ›- Alaska.
- Florida.
- Georgia.
- Illinois.
- Iowa.
- Mississippi.
- Nevada.
- New Hampshire.
States with no income tax often make up for the loss of revenue to the state by charging residents a higher sales, property or excise tax (taxes on goods like fuel, tobacco and alcohol).
What's the downside to living in a state with no income tax? ›States that have no income tax aren't excessively wealthy and benevolent. They simply have a different structure for raising revenue. With no income tax dollars coming in, these states must get that revenue from other sources. Typically, this translates to higher sales taxes, property taxes and/or gasoline taxes.
What is the most tax-friendly state? ›- Alaska. The Last Frontier topped the list of tax-friendly states for 2023, with no state income, Social Security, estate or inheritance taxes, and "a gloriously low average state and local sales tax" of 1.76%. ...
- Delaware. ...
- Wyoming. ...
- Florida. ...
- New Hampshire.
Florida primarily makes up for its lack of an income tax with its sales tax, which generates around 80% of the state's revenue. Florida's sales tax is imposed on services and goods, and both the state and county levy a certain percentage.
What state is best financially to retire in? ›| Rank | State | Sharecare Well-Being Index |
|---|---|---|
| 1 | Ohio | 56 |
| 2 | Iowa | 56 |
| 3 | Minnesota | 62 |
| 4 | Florida | 59 |
The IRS has wide discretion to exercise its levy authority. IRC § 6331(a) provides that the IRS generally may “levy upon all property and rights to property,” which includes retirement savings.
What is the best state to live on Social Security? ›Overall Cost-of-Living Index: 89
Iowa tops the list for best states to live on just a Social Security check thanks to a number of factors.
- Colorado. ...
- Louisiana. ...
- South Carolina. ...
- Delaware. ...
- Nevada. Median real estate taxes paid: $1,660. ...
- West Virginia. Median real estate taxes paid: $719. ...
- Utah. Median real estate taxes paid: $1,837. ...
- Wyoming. Median real estate taxes paid: $1,380.
What states have no tax on Social Security? ›
- Alaska.
- Florida.
- Nevada.
- New Hampshire.
- South Dakota.
- Tennessee.
- Texas.
- Washington.
With savings and investments no longer taxed, Americans willenjoy a capital formation boom. There will be increased productivity,higher paying jobs, and new investment from around the world attracted bya policy of no income taxes. American exports will surge because our prices will be downsharply.
What states are tax free for retirees? ›States That Don't Tax Retirement Income
Those eight – Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington and Wyoming – don't tax wages, salaries, dividends, interest or any sort of income.
For those of us who want to retire in the U.S., there are nine states that have no state income taxes: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming.
What state is worse for taxes? ›| Overall Rank (1=Lowest) | State | Effective Total State & Local Tax Rates on Median U.S. Household* |
|---|---|---|
| 1 | Alaska | 5.84% |
| 2 | Delaware | 6.25% |
| 3 | Montana | 7.11% |
| 4 | Nevada | 7.94% |
- Self-employment tax deduction. ...
- Deduct for business expenses. ...
- Contribute to a retirement plan. ...
- Contribute to an HSA. ...
- Donate to charity. ...
- Child Tax Credit.
There is an additional $50,000 homestead exemption (FLORIDA STATUTE 196.075) for person 65 and older. The adjusted gross income requirement for 2023 cannot exceed $35,167 for all members of the household.
How long do you have to live in Florida to avoid taxes? ›183 Day Rule for State Residency in Florida
Under the rule, the taxing states require that a person looking to declare residency in Florida must reside in Florida for at least 183 days (in other words, one day more than six months).
In lieu of an ad valorem tax, the state levies an annual vehicle license tax based upon the vehicle's net weight. Personal property less than or equal to $25,000 is exempt.
What is the #1 best state to live in? ›What is the number 1 place to retire in the world? ›
1 retirement spot in the country, but a new list from the U.S. News and World Report found Lancaster, Pa., is the best place to retire in the United States. In fact, towns in Pennsylvania made up five of the top 10 ranked metropolitan areas, compared with four towns in Florida making the cut.
Does IRS go after senior citizens? ›Although it is rarely done, the IRS can garnish 15 percent of a senior's Social Security for past-due income taxes. However, this garnishment will never happen without the senior being first notified. The IRS will almost never garnish pensions and other retirement income.
Can the IRS go after your Social Security? ›Because the FPLP is used to satisfy tax debts, the IRS may levy your Social Security benefits regardless of the amount. This is different from the 1996 Debt Collection Improvement Act which states that the first $750 of monthly Social Security benefits is off limits to satisfy non-tax debts.
How much can a senior citizen make without paying taxes? ›For retirees 65 and older, here's when you can stop filing taxes: Single retirees who earn less than $14,250. Married retirees filing jointly, who earn less than $26,450 if one spouse is 65 or older or who earn less than $27,800 if both spouses are age 65 or older.
What happens to my Social Security if I move to another state? ›No matter where in the United States you live, your Social Security retirement, disability, family or survivor benefits do not change.
What is the cheapest state for seniors to live in? ›...
Here are the seven most affordable states to retire, according to Bankrate:
- Michigan.
- Tennessee.
- Missouri.
- Mississippi.
- Kentucky.
- Oklahoma.
- Georgia.
This money (property tax revenue) is utilized to fund essential resources and public services for Texas citizens, including public schools, libraries, emergency services, road maintenance, and community safety measures.
What city has the lowest real estate taxes? ›Montgomery, where the median home value is only about $127,000, takes the prize for the metro area with the lowest average property taxes, averaging just $609 per year, according to ATTOM, which analyzed roughly 220 metro areas.
Which city is tax free in USA? ›Manchester, New Hampshire
Manchester is one of the very few cities with absolutely no sales or income tax. Additionally, New Hampshire residents enjoy the benefit of no state income tax on wages. Families earning $150,000 pay about 9.1% of their income on average in Manchester.
Where is the cheapest place to live on Social Security? ›
- Alabama. 2022 Average Rent: $809. ...
- Oklahoma. 2022 Average Rent: $827. ...
- Kansas. 2022 Average Rent: $814. ...
- Wyoming. 2022 Average Rent: $751. ...
- North Dakota. 2022 Average Rent: $675. ...
- Mississippi. 2022 Average Rent: $799. ...
- Arkansas. 2022 Average Rent: $724. ...
- Iowa. 2022 Average Rent: $712.
Who is eligible for Social Security bonus? For every year that you delay claiming past full retirement age, your monthly benefits will get an 8% “bonus.” That amounts to a whopping 24% if you wait to file until age 70.
Which states do not tax Social Security and 401k? ›If you live in one of these states, you could benefit from not owing taxes on your retirement account distributions. The eight states with no income taxes are Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming.
Will the government survive without income taxes? ›Importance of Taxes in Society
Without taxes, governments would be unable to meet the demands of their societies. Taxes are crucial because governments collect this money and use it to finance social projects.
Living in a state that doesn't tax income can be a major advantage – especially to those in high income households. While many states force high earners to pay high taxes, states without personal income tax do not tax their earnings at all. This allows high earners to save much more of their money.
Can the IRS be abolished? ›While the IRS could be abolished, many of its functions – tax administration, enforcement, and sending rebate checks – would be shifted to state agencies and SSA, including to some states that do not currently collect sales tax.
What is the most tax friendly state for seniors? ›1. Alaska. Alaska is the most tax-friendly state for retirees because it has no state income tax or tax on Social Security. And its sales tax rate is the fourth lowest on our list.
What are the 13 states that don t tax pensions or Social Security? ›Twelve states do tax some or all of their residents' Social Security benefits, however: Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, Rhode Island, Utah, Vermont and West Virginia.
At what age is 401k withdrawal tax free? ›The IRS allows penalty-free withdrawals from retirement accounts after age 59½ and requires withdrawals after age 72. (These are called required minimum distributions, or RMDs). There are some exceptions to these rules for 401(k) plans and other qualified plans.
What is the best state to live in financially? ›...
- New Jersey.
- Hawaii.
- Connecticut.
- Alaska.
- Illinois.
What is the best state to live in to avoid taxes? ›
Which Are the Tax-Free States? As of 2022, Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming are the only states that do not levy a state income tax. Note that Washington does levy a state capital gains tax on certain high earners.
What is the highest amount a person can draw from Social Security? ›The maximum benefit depends on the age you retire. For example, if you retire at full retirement age in 2023, your maximum benefit would be $3,627. However, if you retire at age 62 in 2023, your maximum benefit would be $2,572. If you retire at age 70 in 2023, your maximum benefit would be $4,555.
What state has the lowest property tax? ›- Colorado. ...
- Louisiana. ...
- South Carolina. ...
- Delaware. ...
- Nevada. Median real estate taxes paid: $1,660. ...
- West Virginia. Median real estate taxes paid: $719. ...
- Utah. Median real estate taxes paid: $1,837. ...
- Wyoming. Median real estate taxes paid: $1,380.
- Alaska. Alaska has the lowest tax burden throughout the entire U.S. It's one of nine states currently with no state income tax. ...
- Tennessee. Tennessee comes in second on the list. ...
- Wyoming. Wyoming comes in with the third lowest tax burden among the 50 states. ...
- Delaware. ...
- New Hampshire.
- Alaska.
- Florida.
- Nevada.
- New Hampshire.
- South Dakota.
- Tennessee.
- Texas.
- Washington.
Alaska. Alaska is the most tax-friendly state for retirees because it has no state income tax or tax on Social Security. And its sales tax rate is the fourth lowest on our list. But keep this in mind: The cost of living in Alaska is higher than in most states.
Which states have the worst estate tax? ›Washington, Hawaii, Vermont, and Minnesota also have high tax rates for death taxes. Just as with the federal estate tax exemption, states also have thresholds, and if your estate is less than the amount, you may not have to pay estate taxes. New Jersey and Kentucky have the highest inheritance tax rates in the U.S.
What 3 states have low property taxes? ›- 10 Best States for Property Taxes.
- Hawaii.
- Alabama.
- Louisiana.
- Wyoming.
- Colorado.
- South Carolina.
- West Virginia.
States With No Property Tax For Seniors After Age 65
Alaska: Retirees over 65 get a tax exemption for the first $150,000 of their house's value. Alaska also offers money to people who live here, which may balance out any additional taxes you have.
Are Social Security benefits taxable regardless of age? Yes. The rules for taxing benefits do not change as a person gets older. Whether or not your Social Security payments are taxed is determined by your income level — specifically, what the Internal Revenue Service calls your “provisional income.”
What states to avoid when retiring? ›
- California.
- New Mexico.
- Illinois.
- New York.
- Washington.
- Alaska.
- Louisiana.
- Oregon.
Other popular retirement states
For example, WalletHub ranked Virginia as the best state to retire in its 2023 study, followed by Florida, Colorado, Wyoming, and Delaware. Why Virginia? WalletHub's methodology evaluated quality of life, affordability, and health care using 47 metrics.