Which States Don’t Have Income Tax?

Imagine a place where you don’t ever have to worry about income tax. Now imagine such a place existing in the US. Dreaming aside, certain states in the US have no income tax.

The residents of these states don’t have to pay any kind of personal tax to the IRS during tax time. This obviously makes these states an attractive place to live. But there are other types of taxes imposed by the state governments to generate revenue.

The US has nine income tax-free states– Alaska, Nevada, South Dakota, Florida, Washington, Tennessee, Wyoming, Texas and New Hampshire. While New Hampshire doesn’t impose a tax on earned income, it does tax any income earned from interest or dividends.

Being self-employed in a tax-free state

If you’re self-employed, you might be tempted to move to one of the tax-free states to make the most of your income. While this might seem like a good idea at first, it’s important that you research the other taxes levied by the state government before you commit to the move.

While you don’t have to pay federal income tax on your earned income, you still have to pay the self-employed (SECA) tax on the money that you make. This is 15.3% of your earnings, with 12.4% for Social Security and 2.9% for Medicare. You can actually reduce this tax by writing off certain business expenses.

You can use a 1099 tax estimator to help you find tax deductions. Self-employed individuals also owe quarterly taxes if their total tax is over $1,000. An estimated tax calculator is a useful tool to calculate what you’ll have to pay the IRS.

It isn’t just enough to live in one of the states with no income tax.You also have to establish your business there. Say you have a small business originally based in Ohio. Even if you decide to move to Nevada, you’ll still need to pay the Ohio income tax if your business still operates and generates income in Ohio.

Say you’re a freelance portrait artist living in Nevada. If you paint portraits for clients outside your state, like Arizona, you will have to pay the Arizona state tax and file a state tax return as part of your income comes from another state.

Suppose you also own a home in Virginia that you rent out to a local resident. You will also have to pay the Virginia state tax on the rent you receive as it is income from another state.

Comparing the tax-free income states

New Hampshire charges a 5% tax on income earned on interest and dividends. This tax rate drops by 1% every year and is set to phase out after 2027. Washington also levies a 7% tax on long-term capital gains. This means income from the sale (or exchange) of long-term investments, stocks, bonds or businesses. However, this tax only applies to gains over $250,000.

Sometimes, these states with no state income tax might have higher taxes in other forms to make up for the lack of income tax. For example, Alaska has the lowest tax rates of all these states but is one of the most expensive states to live in and is pretty isolated compared to the rest of the US.  

Similarly, Florida’s income tax rate is 0%. It also has no state tax but the high housing costs makes it quite an expensive place to live. Does Texas have a state income tax? Texas has no state income tax but one of the highest property taxes in the US. Similarly, Washington also has a high cost of living. So, while the lack of income taxes might be a dream come true, other taxes like property tax, sales tax, alcohol tax and fuel tax can quickly add up.

Living in states with no income tax

There are a few advantages if you’re considering moving to a state with no state income tax. The biggest benefit is of course, being able to take home most of your earned income. So, if you’re part of a higher tax bracket, this is good news.

Another advantage is avoiding paying taxes on your IRAs or 401(k)s. This means more money in the bank when you retire. Tax-free states might mean that taxpayers can save more, but it can also mean higher living costs, lack of public infrastructure and community resources.

Planning a move to another state can be overwhelming, especially as a self-employed individual. To make the tax part easier, you can use Ask FlyFin, where you can ask A.I. any tax questions you have and get an answer in seconds.

What if I live in two states?

An important part of taking advantage of the no-income tax states is making sure that you are a “permanent resident” in that state. Also known as “establishing domicile,” taxpayers are only allowed to have one permanent residence state at a time.

Say you’re a freelance journalist living and working in Tennessee but also working in New York for parts of the year. You need to live for at least 183 days out of the year in Tennessee to be considered a permanent resident.

But if you live for over 183 days in New York, you will be considered a “statutory resident” and must pay taxes in both states. You can use a NYC tax calculator if you need to do this.

If you are committed to moving to an income tax-free state, consult a tax professional so that you are prepared financially and have all the documents you need for tax season.