Skip to Content
Tally logo

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). 


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. 

If one of your goals involves paying off high-interest credit card debt, consider Tally†. Tally is a credit card debt repayment tool that can help streamline your debt strategy, paying down debt faster and more efficiently. 

​​†To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. The APR (which is the same as your interest rate) will be between 7.90% and 29.99% per year and will be based on your credit history. The APR will vary with the market based on the Prime Rate. Annual fees range from $0 - $300.