In a NutshellStates get revenue through taxes, much like the federal government does. Seven states have no state-level individual income tax. But these states could make up this lost income in a variety of ways. For example, the trade-off for living in a state with no income tax might be that you live with higher sales or property taxes.
This article was fact-checked by our editors and a member of the Credit Karma product specialist team, led by Senior Manager of Operations Christina Taylor. It has been updated for the 2020 tax year.
Paying taxes is a part of life for most Americans. And while everyone is subject to the same IRS tax laws when they file their federal tax return annually, they don’t necessarily pay the same state income taxes.
Why? Where you live and work affects the state tax laws that apply to you. Some states don’t have any income tax at all — and you may be tempted to relocate to one thinking the move will reduce your overall tax obligation.
While the thought of living in a state where income taxes aren’t taken from your paycheck may be appealing to those who live in states where their income is taxed, there’s usually a give and take. States may need to make up for a lack of income tax revenue in other ways. For example, some states have higher sales tax rates or rely on money from tourism to help fund budgets. Others have local taxes levied by municipalities or counties.
Before you consider a move to a state with no personal income tax, it’s important to know all the details and how they could impact you.
- Which states don’t have income tax?
- Why do state income taxes matter?
- State tax rates vary widely
- How do states with no income tax make money?
When you file your Form 1040, you’re reporting and paying your federal income taxes. Depending on where you live and/or work, you may also have to report and pay state income taxes by filling out and filing a state-level tax return.
Most states tax individual income: 41 states and the District of Columbia tax income, including salary and wages. New Hampshire and Tennessee only tax interest and dividend income. Here are the seven states with no income tax at all.
- South Dakota
Keep in mind, just because you live in a state that doesn’t have an income tax doesn’t necessarily mean you won’t file a state income tax return. If you live in one state and work in another, you may have to file an income tax return in the state where you earn your paycheck. Likewise, if you moved during the tax year and previously worked in a different state, you’ll likely need to file with that state. It’s important to check each state’s tax laws to find out the details.
State income taxes are an important part of a state’s overall budget that helps provide you and other residents — as well as visitors — with essential components of living. This could include things like road repair, infrastructure maintenance, educational systems, government services and more. In fact, individual income taxes are a major source of state government revenue, accounting for 37% of state tax collections, according to the Tax Foundation.
You can choose to live and work in a state with lower or no income taxes in order to reduce your tax obligation — but remember there may be trade-offs. Before you decide to relocate for a job or to avoid state-level income taxes, research other cost-of-living factors in the state. This includes things like sales tax (the extra money you pay when buying certain consumer goods) and property taxes (the money you pay when you own real estate).
It’s also a good idea to crunch these numbers along with other cost-of-living considerations (i.e., housing, transportation and groceries) to learn how much buying power your income has in that state.
States that levy income taxes typically use one of two methods: the graduated income tax or the flat rate income tax. For both methods you first need to figure out your taxable income in order to calculate your state-level income tax obligation.
Of the states with an income tax, 11 use the flat-rate tax method, meaning one rate applies to all levels of taxable income. Those states are Colorado, Illinois, Indiana, Kentucky, Massachusetts, Michigan, New Hampshire, North Carolina, Pennsylvania, Tennessee and Utah. Thirty-one states and the District of Columbia have graduated rate income taxes, meaning your tax rate differs depending on your taxable income level.
What’s more, the number of brackets for those graduated levels varies by state. For example, Hawaii has 12 tax rates and brackets, while the District of Columbia has just six.
These graduated state tax rates can vary greatly. For example, in 2019 California had an income tax rate of 13.3% for couples married filing jointly with income of more than $1,181,484. And New York has a top personal income tax rate of 8.82%. In comparison, North Dakota’s income tax maxes at 2.9%. When you file your taxes, you can learn your tax rate based on your state’s guidelines.
You may be able to file state taxes for free
Some states allow taxpayers to e-file state returns for free directly through the state’s tax agency website. Others participate in state-level versions of the Free File Alliance, which may allow you to file for free depending on factors like age, income or military status. Learn more about filing state taxes for free.
Can state income tax rates change?
Yes, state legislatures can vote on income tax laws and they can be altered from tax year to tax year. For example, North Carolina’s flat income tax was reduced from 5.49% in 2018 to 5.25% for 2019. Here’s another example: Tennessee is phasing out its Hall Tax (the tax on dividends and interest income) and will repeal its income tax completely beginning in 2022. It’s important to keep up to date on state tax laws where you work and live so you know how they affect you.
Your total state tax liability goes beyond simply understanding income taxes. States that don’t levy income taxes may need to get revenue from other sources. Sales tax and property taxes are two key ways that states can earn money in lieu of income tax.
For example, Texas does not impose an individual income tax or state-level property tax, but allows local governments to collect property taxes. In 2017 (the most recent year with available data), county and municipal property tax levies throughout Texas ranged up to 2%. And even though Tennessee currently taxes only dividends and interest earned rather than income, the state also has a 4% sales tax on food, a 7% sales tax rate on most tangible personal property and taxable services, and local sales taxes that can range as high as 2.75% in some localities.
While seven states have no individual income tax, that doesn’t mean living there means living tax free, or that you’ll have a low total tax obligation. States all have ways to fund their budgets appropriately, and that could mean paying higher sales tax, increased property tax and more. All those taxes contribute to your total tax burden each year. By understanding the big picture, you’ll better assess the true cost of living in any state without an income tax.
Relevant sources: Tax Foundation: State Individual Income Tax Rates and Brackets for 2019 | National Conference of State Legislatures: Which States Rely on Which Tax | Tax Policy Center, Urban Institute & Brookings Institution: Brief Book | U.S. Department of the Treasury: Resource Center, State and Local Taxes | Center on Budget and Policy Priorities: Policy Basics: Where Do Our State Tax Dollars Go? | USA.gov: State and Local Taxes |New York State Department of Taxation: Withholding Tax Tables and Methods | North Dakota Income Tax Withholding Rates & Instructions | North Carolina Department of Revenue: Tax Rate for Tax Years 2017 and 2018 | Tennessee Department of Revenue: Due Date and Tax Rates | Tennessee Sales and Use Tax County and City Local Tax Rates | Texas Office of the Comptroller: Property Tax System Basics
Christina Taylor is senior manager of tax operations for Credit Karma. She has more than a dozen years of experience in tax, accounting and business operations. Christina founded her own accounting consultancy and managed it for more than six years. She codeveloped an online DIY tax-preparation product, serving as chief operating officer for seven years. She is an Enrolled Agent and the current treasurer of the National Association of Computerized Tax Processors and holds a bachelor’s degree in business administration/accounting from Baker College and an MBA from Meredith College. You can find her on LinkedIn.