I’m So Over State Income Tax. Where Should I Move?
February 11, 2022
One very interesting aspect of living in America is just how different it is to live in each state. We are a united nation in many ways, but sometimes visiting a different state can feel like traveling to another country. How our schools are run, traffic laws (right on red for the win), and how taxes work all vary depending on which of our great states you live in.
How state income tax, in particular, functions, can look very different across the country. In some states, you’re in the clear and don’t have to pay a penny of state income tax. In others — like California — you can walk away with a hefty state income tax bill come tax season.
If you reside in one of the higher state income tax locations, you may be considering making a change for the sake of your wallet.
Let's take a look at:
How state income tax works
States with no income tax
What you should consider before moving
How to make the most of your new tax savings if you decide to make a move
How does state income tax work?
How state income tax works depends significantly on what state you live in. Typically, there are three models of state income tax used throughout the country.
No state income tax
Nine states don’t collect income tax from their residents:
Alaska
Florida
Nevada
South Dakota
Tennessee
Texas
Washington
Wyoming
New Hampshire doesn’t tax earned income, but it does tax 5% on dividends and interest. While these states don’t tax income, residents still have to pay federal income tax.
Flat tax rates
In these states, all taxable income after personal deductions and exemptions are taken into account will be charged the same tax rate no matter what the resident’s income is.
Graduated tax rates
Similar to how federal income tax, some states divide income into tax brackets and tax each bracket at their own tax rate, with the lowest bracket having the lowest tax rate.
Top ten states with the lowest income tax
You can also compare some of the lowest state income tax rates with your state to see if moving to another state would save you enough money to justify a move — even if you still have to pay some state income taxes.
1. North Dakota
State income tax rate: 1.1% to 2.9%
2. Pennsylvania
State income tax rate: 3.07%
3. Indiana
State income tax rate: 3.23%
4. Michigan
State income tax rate: 4.25%
5. Arizona
State income tax rate: 2.59% to 4.54%
6. Colorado
State income tax rate: 4.63%
7. New Mexico
State income tax rate: 1.7% to 4.9%
8. Utah (tie)
State income tax rate: 4.95%
8. Illinois (tie)
State income tax rate: 4.95%
9. Oklahoma
State income tax rate: 0.5% to 5%
10. Kentucky
State income tax rate: 5%
For more information, check out this complete list of each state’s income tax rates ranked from highest to lowest.
What to consider before moving to a no income tax state
It can be very tempting to move to one of the states that doesn’t have any state income tax with the idea that you’ll save more money and reach your financial goals faster. The idea of saving thousands, if not tens of thousands, of dollars a year just for living in a different state does sound like a pretty good deal.
That said, there are tradeoffs to be aware of before you make any important decisions regarding where you want to live.
Sales tax
To make up for the lost income from not charging state income tax, you may come across higher sales or property tax in those states. In Tennessee, which doesn’t have a state income tax, you’ll come across the highest combined sales tax rate in the country at 9.53%. Washington also skips state income tax, but does have one of the highest tax rates on gasoline (49.4 cents per gallon).
Infrastructure
State income taxes help fund public services like education, infrastructure, and healthcare, so it’s important to note that by paying state income tax you’re helping fund important initiatives that you can benefit greatly from. While South Dakota doesn’t have a state income tax, that state does spend the least on education out of all midwest states. They only spend $10,073 per pupil every year, whereas the nationwide spending average per student is $12,612.
Before making a move, it can be helpful to calculate your total tax burden in the states you’re considering living in. You’ll want to take sales and property taxes into account, alongside income tax.
The cost of a move
Consider both the financial and professional cost of an out-of-state move. The average cost to move from one state to another is $4900. Consider how long into your move it’ll take to recoup that cost from lower state income tax.
Although many companies are embracing permanent work-from-home culture, you may have to find a new job to move out of state. Consider how this might impact your overall earning potential, as well as quality of life.
You may be able to quantify how much you’ll save in state income tax annually with a move, but you may not be able to put a price on things like proximity to family or staying in a state or city you love.
How to make the most of your tax savings
If you do decide to move to a state with no state income tax or at least a lower tax rate than you’re currently dealing with, you’ll want to put your tax savings to work. Not sure what to put your newfound savings towards? Here are a few ideas of how to make your savings work for you.
Pay off debt
Want even more savings? Pay down your credit card debt, student loans and any other types of debt with your tax savings so you can be done with expensive interest payments.
Build an emergency fund
One of the best ways to avoid accumulating more debt is to have a substantial emergency fund ready and waiting in the event you need to fund a car repair, incur a pricey medical bill, or have to pay for an unexpected home renovation.
Save more for retirement
The more you save for retirement now, the more your savings will grow, especially if your funds are invested in a retirement account like a 401(k) or other retirement vehicle.
If you’re unhappy where you live, it might be worth considering a move to a state with lower income tax. Depending on where you’re moving from, you could end up with significant tax savings annually, meaning more money in your pocket to meet financial goals.
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