Moving to a State Without Income Tax
Income taxes can impact your take-home pay directly, leaving you with less money for bills, basic necessities, gifts for family members, and more. People in the United States usually have to pay some federal income tax no matter where they live but they can avoid state income taxes by moving to a state that doesn’t have them.
Learning about the benefits and drawbacks of living in a state without income tax and which states don’t have it can help you find a place to move to that best meets your needs. This guide covers everything you need to know to make a successful move to a state with no income tax.
The benefits of a state without income tax
The biggest benefit of moving to a place with no income state income tax is a lower tax bill. If you have a high income, avoiding state income taxes can be especially helpful. In many states, income tax is based on how much you make and people with higher incomes have higher tax brackets. They have to pay a higher percentage of their income for income taxes every year. Without a state income tax, people can save thousands of dollars per year.
States that don’t have income tax are becoming more appealing to Americans every year. According to IRS migration data, more than 3.1 million people in the United States relocated to states that didn’t have income tax between 2011 and 2018. Even after you retire, moving to a state with no income tax can help you save money. Most 401(k)s and individual retirement accounts or IRAs are funded with money before taxes. They can accumulate interest tax-free until you retire, but you’ll usually need to pay income taxes on any withdrawals after retirement.
If you already live in a state with no income tax and you’re thinking about retiring to a state that does tax income, you can choose a Roth IRA or a Roth 401(k). These accounts are funded with money after taxes and people don’t usually need to pay any additional taxes for withdrawals during retirement.
The drawbacks of a state with no income tax
Moving to a state without income tax can help you save money, but it isn’t always beneficial for everyone. If you have a lower income, you probably won’t need to pay much in income taxes, even if you live in a state that has them.
However, states that don’t have income taxes still need to get money from their citizens somehow. These states often have high sales taxes and property taxes. States with lower income taxes that don’t have higher sales and property taxes often have less income to spend on education, roads and other infrastructure, law enforcement, and other essential services.
Sales taxes mean you pay more for goods and services and property taxes are levied yearly. They’re based on the state tax rate and the value of your property, meaning you usually have to pay more property taxes when you own a property with a high value.
Some cities and towns in states with no income tax also gain revenue by increasing traffic enforcement. Police may issue more speeding and other traffic tickets to make up for a lack of income tax. In these areas, going a few miles over the speed limit or making a turn without signaling could be an expensive mistake.
Even if you live in a state with no income tax, you could need to pay income tax to another state if you make money in that state. For example, someone who owns a business in another state or rents property there to a tenant could need to pay income taxes on the money earned in that state. People usually pay state taxes for as many states as needed when they pay their federal taxes.
States with no income tax
People who want to move to a state with no income tax can choose:
- South Dakota
New Hampshire doesn’t tax earned income, but it still levies a 5% tax on income from interest and dividends. You would need to pay 5% of profits on savings accounts, investment accounts, and retirement accounts.
Many other states may reduce or abolish their income taxes in the future. Not having income taxes encourages people to move to a state, increasing its economy and making it more appealing to visitors. Officials from Mississippi and Arkansas have recently proposed eliminating state income tax. These states still charge income taxes, but they may join the list of states without it soon. Tennessee had an income tax for interest and dividends that was similar to New Hampshire, but the state eliminated it on January 1, 2021.
Moving to a state with no income tax
Relocating to a new state can be complex, even when you don’t consider the tax implications. Following a few proven tips can help make your move easier and less stressful.
Check what you need to be a resident of a new state
For most people, the state where they have residency is the one with a domicile, a place that they think of as home. If your domicile is in one state and you spend more than half a year in another state, you could be considered a “statutory resident” of the state without your domicile. That means even if all your income was earned in the first state, you could need to pay income tax in both states.
If you spend less than half a year in the state with your domicile, it’s a good idea to consider moving to a state where you spend more time. That way, you can avoid paying income taxes to two different states. When you move from one state to another, it’s a good idea to find a new domicile or primary residence as soon as possible to avoid paying two states.
You could also need to pay taxes in a second state if you earn income in that state, even if you don’t visit and employees of your business, family members, or your attorney takes care of any necessary tasks in the second state. Fortunately, in this situation, you only need to pay tax on the income earned in the new state. You would pay tax on the rest of your income to the first state, if applicable.
If you’re moving to a new state, consulting an accountant licensed in that state can help you understand tax laws and avoid an audit. These actions can also be useful for establishing residency:
- Update your mailing address
- Get a driver’s license in your new state
- Register to vote in your new state
- Buy or rent a home in the new state and sell any residences in the former state
- Close any local bank accounts in the old state and open new accounts near your new home
- Keep track of the number of days you spend in each state
If you have any professional licenses, you should up them with your new residence address in your new home state. Also, you should update any pet registrations to let the new state know that your animal companions are up-to-date on vaccinations to protect public safety.
Find reliable movers
Unless you live near a state border, you’ll probably need to find a moving company to take all your possessions to your new residence. It’s a good idea to look for a company that can move large volumes of furniture and other items over long distances. Also, make sure the business you choose is licensed and insured, and compare quotes from a few companies.
Prepare for your move
Before you move, it’s a good idea to lower your moving expenses by getting rid of items you probably won’t use again like old furniture or clothing. You can donate items like these to many different charities. As long as you get a donation receipt, you can deduct the values of the items from your federal income tax. You can also give some of the things you don’t want to friends, neighbors, and family members.
To ensure a successful move, you’ll want to plan ahead to secure packing supplies and research utilities, internet, TV service, and homeowner’s or renter’s insurance for your new home.
Make the most of your move
Moving to a state with no income tax can help many people save money, but there are some potential drawbacks. Before you decide where to move, it’s a good idea to think about your options carefully. In some states, increased sales and property taxes are as costly as or more costly than income tax in other states. Considering your financial situation carefully can help you make a good choice and move to a state that suits your needs.