There are a handful of states in the U.S. that have no income tax. Yes, that’s right, the rate of income tax is 0%. However, while this might sound great, it does not mean that you will pay no tax on your earnings.
Before you make plans to relocate yourself or your family to a state that has no income tax you need to know that while this is certainly a bonus and attraction for moving to a state with 0% income tax, there are other taxes you will pay on your earnings.
There are nine states in the U.S. that have no income tax, and that means you pay 0% state income tax on your paycheck. However, one of the nine states, New Hampshire, taxes you on interest and dividends at a rate of 5%.
States with no income tax list
In alphabetical order, here is the list of states with no income tax:
- New Hampshire (tax on interest and dividends – 5%)
- South Dakota
As of January 1st, 2021, Tennessee no longer imposes a 1% tax on interest and dividends, making it a state that imposes 0% tax on all your earnings.
So, this is good news if you are living in or moving to a state with no income tax per the list above. The bad news is that you are still going to have taxes taken out of your paycheck because the U.S. government also operates at the federal level, and that means paying those pesky federal taxes on your earnings.
Working in one state but living in another
Some people move to one of the many states that have no income tax but frequently work in another state or travel to multiple states for their job or business. This is generally acceptable because your state of residence typically determines the rate of income tax you pay, not how many states you visit or work in throughout the year.
If you work in one state the whole time but live in another, your taxes may not be as straightforward. Typically, if you earn income in one state while living in another you will need to file a tax return in your resident state, making sure you report all the income you earn, regardless of where you earned it.
Sometimes states will have reciprocal agreements with other states that do not require you to file two state income tax returns. If not, then you may be required to file a state income tax return in the state you earned your income, and the state you are a resident of. You should consider consulting a tax professional on matters such as this.
States that have no State Income Tax
The biggest consideration as to whether you move yourself and your family to a state with no income tax is whether you can earn the same or a similar amount as the state you are planning to move from and if you will be paying more in “other taxes” in a no income state.
The states that have no state income tax have to generate tax revenue from other sources, and if your take-home pay is the primary decision-making factor for why you want to move to a state with no income tax, then you will want to find out what other taxes you will be paying and how much it will cost you each year.
Some states impose higher sales tax, which will affect the price you pay on day-to-day items and other consumer goods purchases. States can also charge higher property taxes that will have a significant impact on your annual household expenses. Other states fund their budgets through tourism and taxes associated with this, while some states charge higher taxes on alcohol.
The bottom line is that you need to crunch the numbers based on your income, the state and federal level taxes you are responsible for paying, coupled with cost-of-living considerations that include housing (rent/mortgage), transportation (auto insurance/tax/gas, etc.), and the cost of groceries and staple household items.