Living in These 9 States Means You Don’t Pay Income Tax, But Here’s What to Watch Out For

9 states don’t impose income tax on personal income, but residents should consider these factors.

The federal income tax deadline has been pushed back until May 17, but you may be off the hook for having to file a state tax return altogether, depending on where you live.

Nine U.S. states do not impose income tax on personal income. Living in a state with no income tax means that less money comes out of your paycheck each month, and come tax season you only have to submit a federal return.

As for the rest of the country, thirty-two states (plus D.C.) charge a progressive income tax where higher earners pay a greater percentage of their income than lower earners do, and another nine states charge a flat income tax where everyone is taxed at the same rate regardless of their income level.

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.

Currently, the states with no individual income tax include:

  1. Alaska
  2. Florida
  3. Nevada
  4. New Hampshire (doesn’t tax earned wages, but does tax investment earnings)
  5. South Dakota
  6. Tennessee (as of this year, will no longer tax investment earnings)
  7. Texas
  8. Washington
  9. Wyoming

An analysis of 2020 moving data by United Van Lines found that the Covid-19 pandemic accelerated decisions to move from high-tax states like New Jersey, New York and California to no-income-tax states like South Dakota, Tennessee and Florida (which ranked in the top 10 states with the most people moving in).

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.

What to consider before moving to a state with no income tax

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).

For instance, Tennessee has the highest combined sales tax rate in the nation at 9.53%, according to the Tax Foundation, a D.C.-based think tank. Washington state has one of the highest tax rates on gasoline in the nation, at 49.4 cents per gallon. Of all states, New Hampshire and Alaska rely the most on property taxes, with tax collections accounting for 67.6% and 51.8%, respectively, of their revenue.

Taxes are also a big source of income that the state uses to finance public services such as infrastructure, healthcare and education. Lower taxpayer dollars likely translates into lower funding for these initiatives.

South Dakota, for example, spends the lowest on education of all states in the Midwest, at $10,073 per pupil per year. Nationwide, the average school spending per pupil is $12,612, and Florida, Nevada, Tennessee, Texas all spend less than the average.

To weigh another state’s affordability, consider these above factors as well as the overall cost of living and job opportunities in your field. Leaving a big city, for example, you may have to accept certain trade-offs, such as a lower paying job for more affordable real estate.

And even if you live in a no-income-tax state, you’ll likely still owe federal income taxes if your total income is more than the standard deduction. This is based on your age and filing status, but you can use a federal income tax calculator like this one from SmartAsset to determine just how much you can expect to pay.

Tax season is here: Check out Select’s top tax services

The IRS started accepting and processing tax returns on February 12, but if you haven’t yet filed yours you can still make the process as painless as possible by using one of Select’s best online tax software.

Taxes are traditionally due on April 15, but the IRS extended the federal income tax filing due date to May 17, 2021. You can check your state’s filing deadline here. Some states have changed their due dates to May 17 as well.

Read Full Article>>

Want to receive these articles in your inbox? Join our mailing list