Learn about the benefits and drawbacks of living in Tax free states in the USA, and gain valuable insights into how these states compare in terms of other taxes and living costs.
Choosing to reside in a tax free states in the USA serves as a strategic approach to reduce your overall tax load. Know more about the implications of living in a state without income tax, potential advantages, and understand the drawbacks. Additionally, gain insights through a rapid comparison of the tax landscape and living expenses in nine states that do not levy income tax.
Alaska, Florida, and South Dakota, Texas are some states without an income tax. States with no income tax mainly cover the lost income with other taxes or minimum services. The burden of taxation, known to measure the % of the remuneration paid in local and state taxes, can be quite an accurate measure of affordability compared to the income tax rate alone.
Healthcare cost of living job opportunities is also essential in understanding how expensive a state can be. In 2021 Alaska had the lowest tax burden in the United States of America, even though it was one of the least affordable states to live in.
9 Tax Free States In The USA
Alaska
The Tax in the USA burden in Alaska is around 5.10%. It has no state income or any other sales tax. The state or local tax burden on Alaskans mainly includes property income sales and excise taxes, which is just around 5.10% of your income. It is the lowest tax of all 50 states. The Alaska permanent fund corporation, is resident annually and comprises the revenue or investment earnings from mineral lease rental or royalties. For 2021 the per citizen dividend payment was around $1114. Even though the cost of living in Alaska is relatively high because it is a remote location. At the same time, Alaska levies the second-highest tax on beer in the state in the union, which is 1.07 dollars per gallon. Alaska also has one of the highest-end, constantly rising healthcare expenses in the United States.
Florida
The total tax burden is around 6.97%. Sales and excise taxes in Florida are generally above the national average, but the total tax burden is the 6th lowest in the United States of America. Regarding affordability, Florida ranks 31st. In terms of the school system in 2019.
Nevada
The total tax burden here is 8.23%, and the state relies mainly on the income from high sales tax on everything, including groceries to clothes. It also has sin taxes on alcohol and gambling. This results in a state-imposed tax burden on personal income, which is currently the second-highest on the list. But it also ranks high in affordability because of its high cost of living.
South Dakota
Like other states with no income tax, South Dakota ranks in revenue through different forms of taxation like cigarettes and alcohol. The Lakota homes have one of the highest sales tax rates in the country, and they are also above the property tax rates. South Dakotans generally pay 7.3% of the total income in taxes. When it comes to affordability, the state ranks 14th.
Stay ahead in tax planning – our Online Tax Calculator ensures accurate estimates every time.
Texas
The total tax burden here is around 8.19%. The personal income taxes are so much here that Lone Star State loathes them so much that it is decided to forbid them in the state’s constitution. It is because the infrastructure and services should be paid for somehow and taxes relies on income from sales and excise taxes to cover the bill. Sales tax is relatively high in some jurisdictions ranging to 8.25%. Property taxes are also high in most states, with a total tax burden of 8.91% of the personal income. Furthermore, taxes are the average affordability at 22nd in the nation.
Washington
Washington hosts several young populations, and the state is in its 44th term in affordability. Most employers stay in Washington because of the lack of state-mandated corporate income tax. Even though residents end up paying high taxes in terms of sales and excise, gasoline is expensive in Washington compared to other states.
Wyoming
Experts say that only six people per square mile stay here, the second least densely populated state after Alaska. Citizens do not pay any personal or corporate state income Tax in the USA year, and there is no retirement income tax. The total Tax in the USA burden here includes the income property sales and excise taxes that work as a percentage of personal income, around 6.14% ranking the third-lowest in the state, just like in Alaska, Wyoming, Texas, natural resources, general oil to make up for the lack of personal income tax.
New Hemisphere
The total tax burden here is around 6.84%. It does not tax any earned income but has a tax on dividends and interest. The legislation was passed to phase out the investment income by 1% yearly over five years, with full implementation by 2027. The state does not levy any state sales tax but levies excise taxes besides alcohol tax. The total tax burden in the new hemisphere ranks 5th in the nation.
Tennessee
In the list of tax free states in the USA, Tennessee has the fourth-lowest total tax burden at 6.22%, ranking 14th in affordability and 24th in the ‘Best States to Live In’ list. In 2021, education spending per student was low at $10,507, and healthcare spending per person in 2020 was $9,336, both placing Tennessee among lower-ranking states.
Why Do States Charge Some State Taxes?
The federal government was granted the authority to impose taxes on the citizens after adopting the USA constitution. Each state has rightly retained to assess what kind of tax it generally wants.
Irrespective of the challenges of the no-tax state space, some seem to find an outstanding balance between low affordability taxes and providing a better place to live. Low taxes do not give a complete image of the cost of living for any state, which is proved here. You can check the guidelines before accepting the job or moving to these states.
Which States Don’t Tax Retirement Distributions?
Twelve states exempt retirement distributions from taxation, including Illinois, Mississippi, and Pennsylvania, which don’t tax distributions from 401(k) plans, IRAs, and pensions. Additionally, nine states, such as Alaska, Florida, and Texas, don’t impose any state tax, while Alabama and Hawaii exempt pensions but tax distributions from 401(k) plans and IRAs.
However, states often offer other benefits for retirees. For instance, Colorado provides a retirement income deduction of up to $20,000 for taxpayers aged 55 and older, increasing to $24,000 for those 65 and older. Similarly, Georgia allows taxpayers aged 62 and above to exclude up to $35,000 of their retirement income, with a higher exclusion of $65,000 for those 65 and older. It’s advisable for retirees, or those nearing retirement, to explore the tax advantages offered by each state for a comprehensive understanding.
Pros and Cons of Living in a State Without Income Tax
Retirement Benefits
In retirement, taxes are inevitable for most, whether on 401(k) distributions, pensions, or Social Security benefits in certain states. However, residing in states without personal income tax exempts retirees from state taxes on retirement income, potentially boosting their savings.
While tax advantages are appealing, consider other financial and personal factors before relocating. Some states may offer limited public transportation, expensive healthcare, high property taxes, or minimal senior care support, which could impact your overall well-being.
Other Tax Considerations
States rely on taxes for essential services like healthcare and infrastructure. tax free states in the USA might compensate by increasing property or sales taxes. For homeowners in states with low property taxes, maintaining that benefit may outweigh the savings from income tax exemption.
Living in an Tax-free state in the USA, except for New Hampshire and Washington, shields capital gains from state taxes, reducing your tax liability to the federal level based on the asset’s holding period.
Establishing Domicile
To benefit from tax advantages in a no-income-tax state, establishing domicile—declaring a state as your permanent home—is crucial. Requirements vary, but typically, residing in a state for at least 183 days a year qualifies you as a permanent resident. Residency audits ensure compliance, necessitating proper documentation.
Be cautious of dual residency, as spending significant time in multiple states can lead to tax complications. Seeking guidance from financial advisors can help navigate complex tax scenarios.
Cost of Living Analysis
Assessing the cost of living is vital when considering relocation. Beyond tax savings, evaluate housing, food, healthcare, and overall lifestyle expenses to determine if moving balances financial benefits with quality of life.
Consider your job prospects, especially in industries with limited opportunities in certain states. While remote work offers flexibility, potential job disruptions could pose challenges in securing new employment.
Conclusion
Living in one of the tax free states in the USA has its own perks. It means you won’t have state income tax deducted from your paycheck, leaving you with more take-home pay. This can be particularly advantageous for individuals and families looking to maximize their disposable income. Additionally, retirees often find these states attractive, as they can stretch their retirement savings further without the burden of state income taxes.
However, it’s essential to consider the broader tax landscape. While income tax might be absent, some states compensate through other forms of taxation, such as higher sales taxes or property taxes. Therefore, a comprehensive analysis is crucial to understand the overall tax picture. Get in touch with Vakilsearch for more tax related consultation.
Frequently Asked Questions
Which state in the USA is tax free shopping?
The majority of US states impose sales tax, yet Alaska, Delaware, Montana, New Hampshire, and Oregon presently do not have statewide sales tax.
Which states do not have sales tax in US?
Alaska, Delaware, Montana, New Hampshire, and Oregon. Consider consulting a financial advisor to optimise your long-term tax strategy.
What is the most tax friendly state in the US?
Wyoming ranks as the most tax-friendly state in the U.S., with Nevada, Tennessee, Florida, and Alaska following closely behind
Can foreigners shop tax free in the USA?
Foreign visitors are not eligible for sales tax refunds by the United States Government. Sales tax collected within the country is remitted to individual states, mirroring the process of Value Added Tax (VAT) in numerous other nations.
How much money can I get from India to the USA tax free?
NRIs are permitted to transfer up to ₹1 million from India to the USA without incurring taxes, thanks to Section 206C(1G) of the Income Tax Act, which exempts them from applicable TCS when moving funds from their NRO to NRE account.
Also Read,
