What states have no income tax? Does it make the living standards better or not? Read on to find out.
You generally need to document a federal tax return if your overall salary is more than the standard deduction, which fluctuates depending on your age and recording status. In some cases, you are expected to document regardless of whether your pay is less than the standard deduction, for example, having independent work income, being claimed as a dependent on somebody’s expense form and having procured or unmerited pay over specific edges, and recording independently as a married couple with net pay of $5 or more. A few groups, be that as it may, are free with regards to recording a state expense form. That is on the grounds that seven US states don’t force state income tax.
If you say that you do not want a lower tax bill, then you are totally lying to yourself. Everyone on this planet would want a low tax bill. If you end up living in a state with no income tax, you will have a lower tax bill. As of 2021, seven states — Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming — charge their individuals with no state income tax. In addition to this, two others states — New Hampshire and Tennessee, don’t charge their citizens with earned wages. Although Tennessee used to tax investment income and interest, the Hall income tax was completely canceled on Jan. 1, 2021. Currently, New Hampshire taxes its citizens with investment income and interest, yet it is set to take out those expenses soon. As a result, the number of states that charge no income tax will change to nine by 2024. In case you have resigned, it additionally implies that there will be no state personal duty on your Social Security benefits, withdrawals from your IRA or 401(k) plan, and even payouts from your annuity.
However, obviously, no state is great. The states without an income tax actually need to pay for roads and schools, so citizens are actually required to pay other taxes to keep the state running (like sales, property and estate taxes). Also, at times those other taxes can be on the very good quality. New Hampshire and Texas, for instance, have the largest property taxes in the country.
If you want to know more about what states have no income tax, then you have come to the right place. We have gathered all relevant information to help you understand everything that you need to know. So, if you’re thinking of moving to a state without an income tax, continue reading to see some of the other taxes you’ll have to pay in those states. Maybe the state you’re in right now won’t look so bad! Without much further ado, let us dive right in!
Table of Contents
- 1 Why do states not have income tax?
- 2 How state income tax rates work?
- 3 2021 income tax rates by state
- 4 Advantages and disadvantages of living in states with no income tax
- 5 Tennessee and New Hampshire income tax
- 6 Other state taxes fill the revenue void
- 7 10 states with the highest personal income tax rates
- 8 States with the highest and lowest property taxes
- 9 Conclusion
Why do states not have income tax?
You should realize that each state’s annual duty is set up at the state level. In this manner, it is absolutely up to the individuals who make the law to choose the amount to remove from occupants’ checks. Their explanations behind nixing personal duties could be driven by their goals for charge strategy, as a motivation to pull in new occupants, or because of an increment in income from another source. The state personal expense was revoked after an oil blast during the ’70s in Alaska. The lion’s share of Alaska’s income comes from the oil industry movement in the state. Gold country concluded that it could get a large portion of the income it required from the oil business, so the express not, at this point expected to burden inhabitants’ wages.
How state income tax rates work?
Taxes in general are something that most people find hard to understand. Now if you add state income taxes to the mix, things might not look pretty easy especially for all those who hate doing their taxes. Understanding state income taxes can be quite tiring and stressful too. Therefore, as a rule, states adopt one of three strategies in order to tax their citizens and/or the employees working such states:
- No tax income by any means.
- Flat tax. That implies they charge all pay, or profits and premium just sometimes, at a similar rate.
- Progressive tax. That implies individuals with higher available salaries pay higher state annual duty rates.
In the event that, as the vast majority, you live and work in a similar state, you likely need to record just one state return every year. However, in the event that you moved to another state during the year, lived in one state yet worked in another or have, say, paid creating investment properties in different states, you may have to record multiple. What’s more, in light of the fact that the cost of most expense programming bundles incorporates planning and petitioning for just one state. Documenting numerous state annual government forms frequently implies paying extra.
2021 income tax rates by state
It is very important to know how much tax you have to pay. However, we can understand that keeping track of taxes can be very hard and tiring. Therefore, we have got your back. Given below is a list of the income tax rates by state for the 2021 tax year. Read the list carefully to see what tax rate your state follows. This will help you in understanding how much tax you have to pay. Let us have a look:
- Alabama: 2%-5%
- Arizona: 2.59%-8%
- Arkansas: 2.0%-5.9%
- California: 1%-13.3%
- Connecticut: 3%-6.99%
- Delaware: 0%-6.6%
- District of Columbia: 4%-8.95%
- Georgia: 1%-5.75%
- Hawaii: 1.4%-11%
- Idaho: 1.125%-6.925%
- Iowa: 0.33%-8.53%
- Kansas: 3.1%-5.7%
- Louisiana: 2%-6%
- Maine: 5.8%-7.15%
- Maryland: 2%-5.75%
- Minnesota: 5.35%-9.85%
- Mississippi: 3%-5%
- Missouri: 1.5%-5.4%
- Montana: 1%-6.9%
- Nebraska: 2.46%-6.84%
- New Jersey: 1.4%-10.75%
- New Mexico: 1.7%-5.9%
- New York: 4%-8.82%
- North Dakota: 1.1%-2.9%
- Ohio: 0%-4.797%
- Oklahoma: 0.5%-5%
- Oregon: 4.75%-9.9%
- Rhode Island: 3.75%-5.99%
- South Carolina: 0%-7%
- Vermont: 3.35%-8.75%
- Virginia: 2%-5.75%
- West Virginia: 3%-6.5%
- Wisconsin: 3.44%-7.65%
States with flat income tax rates are:
- Colorado: 4.55%
- Illinois: 4.95%
- Indiana: 3.23%
- Kentucky: 5%
- Massachusetts: 5.0%
- Michigan: 4.25%
- New Hampshire (on dividends and interest income only): 5%
- North Carolina: 5.25%
- Pennsylvania: 3.07%
- Utah: 4.95%
Advantages and disadvantages of living in states with no income tax
Alaska has no state income or sales tax. Alaskans have the lowest total state and local tax burden out of all 50 states, standing at 51.6% of personal income. In comparison, New York’s tax burden is 12.28% of personal income which is the highest in the nation. The cost of living in Alaska is high and it levies the second highest beer tax out of any state in the union at $1.07 per gallon, surpassed only by Tennessee with its highest beer tax. The state ranks 45 out of 50 in affordability and 44 out of 50 in the U.S. News & World Report list of “Best States to Live In.”
Florida is a popular snowbird state and has a large population of retirees. Sales and property taxes in Florida are above the national average, but with the overall tax burden of just 6.82% – the fifth lowest in the country. Florida ranks 35th in affordability but due to higher-than-average cost of living and housing costs, it is still not as affordable as most states. However, Florida comes in at 13 on the U.S. News & World Report “Best States to Live In” list.
Nevada generates most of its revenue from high sales taxes on basically all the consumptive goods and services, including but not limited to sin taxes on alcohol and gambling and groceries etc. This heavy reliance on high sales taxes results in an overall state-imposed tax burden of 8.39% of Nevadans’ personal income. When it comes to affordability, Nevada is at number 42 owing to the high cost of living and housing. The state ranks 37th in the U.S. News & World Report “Best States to Live In” list.
In addition to this, Nevada’s educational spending in 2018 was $9,417 per pupil, the fourth-lowest in the western region of the U.S. The American Society of Civil Engineers gave Nevada a grade of C during the same period. Nevada received an F grade from the Education Law Center in 2015 and was also the worst state overall in terms of the fairness of its state school funding distribution. Nevada’s healthcare spending in 2014 was $6,714 per capita, the lowest on this list and the fourth-lowest nationally.
South Dakota’s revenue stream relies heavily on taxes on cigarettes and alcohol. It has a higher-than-average property-tax rate but lower sales-tax rates than many other states. South Dakota as a hub of several major credit card companies and with its higher property tax rates aids in keeping the state’s residents income-tax free. South Dakotans pay just 7.86% of their personal income in taxes, putting the state 11th in terms of the overall tax burden. The state ranks 14th in affordability and 20th in the U.S. News & World Report “Best States to Live In” list.
Given the fact that the Lone Star State decided to forbid the personal income taxes in the state’s constitution, it has to rely on income from sales and excise taxes to keep the state running. In some jurisdictions, sales taxes can be as high as 8.25%. Property taxes are also higher than in most states, bringing the overall tax burden at 8.20% securing a 19th rank out of 50 states . Texas is average for affordability at 23rd in the entire nation, but it was ranked 38th by U.S. News & World Report in the “Best States to Live In” list. Furthermore, one advantage of living in a no-tax state is that the $10,000 cap on state and local tax (SALT) deductions imposed by the Tax Cuts and Jobs Act will likely not have as great an impact as it does on residents of high-tax states, such as California and New York.
In Washington residents pay high sales and excise taxes, with gasoline more expensive in Washington that in most others states. The state comes in at 22 out of 50, with an overall tax burden of 8.32%.
In addition to this, Washington has an unusually higher-than-average cost of living and housing which puts it at 44th in affordability. However, it was ranked by U.S. News & World Report as the overall best state to live in for 2019. Washington spent $7,913 per capita on healthcare in 2014, $132 below the national average. In 2018, Washington spent more on education than most with an average of $12,995 per pupil.
With an expected six individuals for each square mile, Wyoming is the subsequent least thickly populated state, outperformed simply by Alaska, which has about one human for each square mile. Residents pay no close to home or corporate state annual expenses, no retirement personal duties, and appreciate low property and deals charge rates. The general taxation rate — including property, pay, deals, and extract charges as a level of individual pay — is 6.47%, positioning the state fourth most minimal. Like Alaska, Wyoming charges common assets, fundamentally oil, to compensate for the absence of an individual personal assessment. The state positions a normal 28th in moderateness and 31st on the rundown of “Best States to Live In.” Although Wyoming hasn’t got an authority letter grade for its framework yet, the American Society of Civil Engineers found that 9.9% of its scaffolds are fundamentally insufficient and 99 of its dams have a high-danger potential.
Prior to 2016, Tennessee charged its citizens with investment income tax, including most interest and profits, yet not wages. A law passed in 2016 incorporated an arrangement to bring down expenses on unmerited pay by 1% each year until the assessment was killed toward the beginning of 2021. To make up for the loss, Tennessee demands high sales taxes and the most noteworthy beer tax of any state in the association at $1.29 per gallon. With full execution of the new enactment, Tennessee hopes to pull in retired people who rely intensely upon venture pay. The state’s all out taxation rate is 6.18%, the third lowest in the country. When classifying as to how affordable this state is, know that Tennessee generally positions at 22nd, and 30th in the U.S. News and World Report list of “Best States”.
Furthermore, in addition to this, in 2018, at $9,544 per student, Tennessee positioned itself simply under Texas as far as instruction spending in the southern U.S. It improved occupation than the Lone Star State of reasonably disseminating its school financing, acquiring the Equality State a C in 2015. After a year, the American Society of Civil Engineers gave Tennessee similar evaluation for its foundation. At $7,372 per capita, Tennessee positioned 39th as far as medical care spending in 2014.
Earned income is not taxed by states like New Hampshire, yet it does tax its citizens with profits and interest. New Hampshire’s Senate passed an act to eliminate the investment income tax by 1% each year for more than five years, with full execution by 2025. The state has no state sales taxes except for excise taxes, including charges on liquor, and its normal local charge pace of 2.20% is the third-most noteworthy in the country. Even in this way, New Hampshire’s state and neighborhood taxation rate is only 6.85%, positioning the state 6th in the nation. The state positions second on the U.S. News and World Report rundown of “Best States to Live In” and a moderate 26th in the country for moderateness.
While New Hampshire spent more on training than some other state on this rundown, at $16,893 per understudy in 2018, it was the fourth-most minimal in the northeastern area of the U.S. Furthermore, in 2015, it procured an evaluation of D from the Education Law Center for its school financing dissemination. New Hampshire got an imperceptibly better evaluation of C- for its foundation in 2017. At $9,589 per capita in 2014, its medical services spending is the 9th highest in the country.
Tennessee and New Hampshire income tax
Tennessee has shown gradual reduction in its “Hall tax” on interest and dividend income. The state’s 6% Hall tax rate was reduced by 1% increments annually in the past years, with it coming to an end in January, 2021. The Hall tax rate was just 1% in tax year 2020. New Hampshire determined a 5% tax on interest and dividend income beyond $2,400 in 2020. Interest and dividend income were not taxed for married couples filing joint returns until it exceeded $4,800. An additional $1,200 exemption was available for certain taxpayers who were disabled, blind, or over the age of 65.
Other state taxes fill the revenue void
State income taxes are one of the ways through which states raise revenue. If a state does not have state income taxes, one typical source of raising funds is sales tax. Florida, for instance, levies a 6% sales tax and the average locality tax on 1.05%, bringing the combined average to a 7.05%. Tennessee, has the highest combined sales tax in the U.S. standing at 9.53%. Washington state taxes 49.4 cents per gallon on gasoline which is one the highest rates in the US. Alaska has no statewide sales tax with a few exceptions in some of its localities, whereas New Hampshire has no sales tax at all.
One of the other sources of creating revenue is the use of property taxes. New Hampshire owes nearly 68% of its revenue stream to property taxes which is also the highest rate of any state. In fact, four of the top five states that rely the most on property taxes have no income taxes. Alaska with 51.8% is second, New Jersey stands at third – even though it has state income tax as well – Texas with 45.0% is fourth and Wyoming with 44.5% is fifth.
States do not have to rely on the aforementioned types of taxes alone to generate revenue. A large part of Alaska’s income consists of revenue from taxing the drilling and selling of oil. Wyoming also collects plenty of revenue from so-called severance taxes, which are taxes imposed on the extraction of natural resources. WalletHub rates New York state with the highest total tax burden, equalling about 12.3% of income, followed by Hawaii at 11.5%. Alaska has the lowest tax burden at 5.2%, with Delaware in second place at 5.5%.
10 states with the highest personal income tax rates
A quick study of 2020 tax rates compiled by the Tax Foundation ranks California as the top taxer with a 12.3% rate. However, if you make more than $1 million then you have to pay 13.3% as the top tax rate. The additional tax on income earned above $1 million constitutes as the state’s 1% mental health services tax. The following list shows the top 10 highest income tax states (or legal jurisdictions) for 2020:
- California 13.3%
- Hawaii 11%
- New Jersey 10.75%
- Oregon 9.9%
- Minnesota 9.85%
- District of Columbia 8.95%
- New York 8.82%
- Vermont 8.75%
- Iowa 8.53%
- Wisconsin 7.65%
Each of these states has a personal income tax floor, deductions, exemptions, credits, and differing levels of taxable income that determine what a citizen actually pays.
States with the highest and lowest property taxes
Property tax comes under local jurisdiction. Median house property tax payments from an investigation carried out by the Tax Foundation cites the following as the counties with the highest property tax:
- Essex County, New Jersey 16.86%
- Passaic County, New Jersey 14.62%
- Union County, New Jersey 12.70%
These Louisiana parishes hold the least expensive spots for property tax as a percent of income:
- Assumption Parish 0%
- Vernon Parish 0.45%
- Grant Parish 0.68%
Due to the fact that Louisiana offers a homestead exemption, it carries some of the lowest property tax rates as a percentage of earned income. This law allows the first $7,500 of assessed property values to forego having property taxes levied against them.
For example, home values that are assessed represent 1/10th of the home’s actual value. Accordingly, the assessed value of a home costing $100,000 will stand at $10,000. In this particular case, the Louisiana’s homestead exemption ends up allowing the first $75,000 of home value to be not counted toward the calculation of one’s property tax bill. This exemption ensures that the percentage of income that goes toward these taxes is lowered dramatically.
Now that you have read this article, you know all about what states have no income tax. In spite of the difficulties no-tax states face, some of them appear to discover a harmony between low assessments, affordability, and giving an extraordinary spot to live. In addition to all this, one thing is clear: Low assessments alone don’t give a total image of the average cost for basic items in any state recorded in this article. Truly, charges are a major piece of a great many people’s financial plans. However, you may have different motivations to move that don’t rely on your assessment bill. For instance, you may require clinical consideration in a zone that has higher expenses. Or then again you may wish to live near your youngsters or grandkids. Or on the other hand you may essentially like the view out your back window. With the information that you have about US states now, it will be simpler for you to determine which of them don’t have income tax, and which state is perfect for you to live in.