South Dakotans pay just 6.69% of their personal income in taxes, according to WalletHub, ranking the state eighth in terms of the total tax burden. The federal income tax is a progressive https://1investing.in/ tax, which means that the more income you earn, the more you’re taxed. The income tax rate is divided into brackets, and you pay taxes based on the brackets your income falls into.
- As one of the largest states in the country with a whole lot to offer, Texas is a very attractive state to live in.
- However, it’s important to remember that each state has its own unique tax structure.
- America’s largest state is also considered one of the most tax-friendly.
So if you’re considering moving to tax-free states, you should be aware of other taxes that might apply in that state. You can pay absolutely nothing in state taxes, just by packing up your bags and moving to a tax-free state. Last year, the IRS began developing a free tax filing service months after receiving an influx of $80 billion from the Inflation Reduction Act, which was signed into law by President Joe Biden. New Hampshire’s interest and dividend levies a 5% tax on interest and dividend income. After that, New Hampshire will repeal its interest and dividend tax entirely. Illinois, Mississippi, and Pennsylvania don’t tax distributions from 401(k) plans, individual retirement accounts (IRAs), and pensions.
While moving to a state with no income tax may sound appealing, it comes with trade offs. 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). In the nine states with no income tax (listed below), all residents avoid paying tax on their earnings. We include New Hampshire in this list as it has no tax on earned wages, but note that it does charge a flat income tax on investment earnings.
Some income tax-free states, like Alaska, Florida, and Washington, have higher living costs than the national average, while others, like South Dakota and Wyoming, offer a more affordable lifestyle. Because there are a number of additional state taxes imposed outside of income tax, the best states for taxes are really on a case by case basis. You must consider all taxes imposed, plus the cost of living in each state.
This means that taxes in other areas – such as sales tax or property tax – are much higher for residents. Residents do pay high sales and excise taxes, and gasoline is more expensive in Washington than in most other states. The state comes in at 26 out of 50, with a total tax burden of 8.24%. While living in a state without state income tax can offer significant financial advantages, it’s important to consider other taxes that may be imposed, such as sales, property, and excise taxes. For example, Nevada relies heavily on high sales taxes and “sin taxes” on products like alcohol and gambling to fund its state government. State taxes are often used to generate revenue for services such as health care or to fund infrastructure.
States with flat income tax rates
In terms of cost of living, South Dakota has relatively low costs for housing, transportation, and utilities. However, the state’s infrastructure is notably deteriorated, with 17% of bridges rated structurally deficient and 90 dams considered to have high hazard potential. Those considering a move to South Dakota should weigh the cost of living benefits against the potential impact of the state’s infrastructure challenges. According to the Tax Foundation, Tennessee does impose a 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 7.6% as of 2022, the third-lowest in the country (behind Wyoming and Alaska). Additionally, the following are tax-free states in the USA that don’t have income taxes for earned income, but they do tax dividend and interest income.
Tennessee compensates for its lack of income tax with high sales taxes. The state ranks 29th on the “Best States to Live in” list, with a total tax burden of 6.84%. Tennessee does not tax earnings from investments or interest, making it attractive for those seeking to save on tax free states in us taxes. Generally, taxpayers must file a state income tax return annually to determine their tax obligations. Income tax is a tax imposed by a government on income generated by individuals and businesses. Here’s another example, Nevada doesn’t have an individual income tax.
Cost of Living in States Without Income Tax
Washington ranks towards the bottom when it comes to affordability, but it does have relatively average sales and local tax. Along with no state income tax, the state of Washington also doesn’t impose a corporate income tax. The largest, and considered one of the most tax-friendly states in the United States, Alaska repealed its personal income tax in 1980. A couple of downsides of living there are the remote location and steep cost of living relative to median family incomes. South Dakota has no state income taxes and its sales taxes are in the bottom third of the country, which is good.
The state also doesn’t impose sales taxes but levies excise taxes on goods such as tobacco. Most people can expect to pay at least some taxes during retirement — whether on 401(k) distributions, pensions or even Social Security benefits in some states. However, residents of states without personal income tax generally get to skip paying state taxes on retirement income, which can mean more money for your golden years.
For 2023, you can use Free File with an adjusted gross income of $79,000 or less, which is up from $73,000 in 2022. Free File also offers Fillable Forms for all income levels, which is the electronic version of a paper filing, Hugo said. John Waggoner covers all things financial for AARP, from budgeting and taxes to retirement planning and Social Security. Previously he was a reporter for Kiplinger’s Personal Finance and USA Today. You may have other reasons to move that don’t hinge on your tax bill.
Many taxpayers may be able to file their state tax return using IRS Free File
While living in a state with no income tax may seem like a financial paradise, it’s important to understand that these states generate revenue through other taxes, such as property taxes or sales taxes. While it seems great to live in a state where there are no personal income taxes, remember that all states have to generate their own revenue. South Dakota, home to Mount Rushmore and Badlands National Park, is often lauded as one of the top locations for retirees. News & World Report ranks it at 8 out of 50 nationally for its housing and cost of living scores. South Dakota’s overall sales and local tax burden is 8.4% as of 2022; 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 though, which is higher than many other states.
Below, Select breaks down what taxpayers should be mindful of before relocating to one of these tax-friendly locations. And as tax season is upon us, we also share our recommendations on the best online tax software for filing your state (if applicable) and federal returns. State income tax return deadlines usually mirror the federal deadline, but exceptions exist. Residents of Virginia, for example, generally get until May 1 to file their state returns. Check with your state’s tax and revenue authority for further information. CrossLink is the industry’s leading professional tax software solution for high-volume tax businesses.
With this user-friendly tax software, registered NerdWallet members pay one fee, regardless of your tax situation. If you live and work in the same state, you probably need to file only one state return each year if applicable. But if you moved to another state during the year, lived in one state but worked in another, or have, say, income-producing rental properties in multiple states, you might need to file more than one. It is one of only 5 states in the whole country that have absolutely no sales tax. Its overall tax burden would fall somewhere around the lowest 10% in the country.