Everyone wants taxes to be lower. Taxes are something that people are more than inclined to complain about, and they see them as a way the government takes away their hard-earned money. While in the United States, you must pay federal and state taxes. One way to get a lower tax bill is to live in a state that has no income tax. As of 2021, nine states are considered to be states without income tax.
Tennessee, starting in 2021, has just gotten rid of taxes on investment income, which will represent dividends, capital gains taxes and interest. New Hampshire does not tax personal income, but has taxes on investment income and interest that will be phased out by 2023.
The great thing about these tax-free states is that you can earn as much as you want without paying income tax to the state government. Even living in retirement, you can live without worrying about whether your income is subject to income tax from Social Security. This is a big win for those living in high tax states. If you primarily work from home, you can live in an income tax-free state. This allows you to save more money and channel it towards savings or high yielding investments.
States without income tax
Here is a list of nine states that are not subject to income tax:
- Alaska
- Florida
- Nevada
- New Hampshire
- North Dakota
- Tennessee
- Texas
- Washington
- Wyoming
After looking at these states, you may wonder how these states generate income. Most states will generate income from income taxes, sales taxes, property taxes, and other higher levies on goods such as tobacco and alcohol in the United States. In states where there is no income tax, sales and property taxes are used primarily to generate income.
When we look at some of the pros and cons of introducing income taxes in these states, you can understand the implications that need to be discussed. Ideologically speaking, we have two sides to the tax problem. On the one hand, people with high incomes prefer their wages not to be taxed even higher. The other side sees taxes as a means to create a better society through better education, infrastructure, and increased government services that can help improve your life.
In states where there is no income tax, low income taxes represent a great opportunity for innovation, growth, and attracting young people looking to avoid tax increases on their income. It creates a culture of development within the business economy and attracts young minds who help create a thriving economy.
Why move to one of the states without income tax?
The benefits of moving to one of the states without income tax are obvious. You don’t have to pay income tax on your income, which means you can keep most of your money and use that savings to invest it. With more money, you can look for more investments for your Roth IRA or other retirement accounts.
Unlike other taxes that you may face, such as property taxes or even sales taxes, income tax is a tax on your personal income. Thus, the more money you make, the more you have to pay. If you’re already paying a ton to the federal government, you don’t want to pay any more to the state government.
One plus is that it can also help you with your retirement. Moving to the state without income tax means that these laws will also apply to your retirement fund. It is not in vain that retirees flock to states such as Florida and Arizona. The absence of income taxes in these states and warm weather attracts many retirees here. They can live to retire without paying additional taxes to the state government.
Does money save life in a state without income tax?
It is believed that the less you pay income tax, the more you can save. This is true under this assumption. At this stage, you need to look at what the states will do to generate income.
The state government uses tax money to repair roads, fund law enforcement, and other services such as education and firefighters. Funding for these public services comes from income tax, sales tax, and property tax. Without income tax, the government must increase taxes in other areas to fund some of the government services they provide.
In states where there is no income tax, the states levy taxes and various measures, such as a higher sales tax or even a higher property tax. It is a way of generating income for the state, and also the belief that many people who come from out of state can earn income from a higher sales tax.
Washington state has the highest gasoline taxes and duties at 49.5 cents a gallon, making it the most expensive gasoline in the country. New Hampshire and Alaska have some of the highest property taxes in the United States; they receive 45 to 63% of their taxable income from property tax.
If you do not have a high income, this can badly affect your economic status. The higher the sales tax, the more you have to pay, which will cost you more.
There is no income tax in Washington state, but there is a high sales tax. According to The Tax Foundation, an independent think tank, the Washington DC sales tax rate is 6.50%, with the addition of the local tax rate and a gross sales tax of 9.29%. Because Oregon is in the south, where the sales tax rate is 0%, Washington residents head south to shop.
Tennessee has the highest sales tax rate in the country. Without income tax, the state must somehow generate income.
Do states without income tax outperform another state?
You need to ask if the absence of income tax helps a state perform better than other states. According to the study, four out of ten states with the most significant economic forecasts are those that do not have income tax. This could be for a variety of reasons.
Income tax-free states attract workers and businesses. People want to work where there are fewer taxes, and this is beneficial to your company’s bottom line, and people get the opportunity to work without paying more taxes.
Texas, Washington, Nevada and Florida are some of the fastest growing states in the country. As the economy grows in these states, there will be more incentives for other people to move there, which will allow them to generate more income from sales and property taxes.
The lack of income tax can be costly for these states. With less income tax, you will have less income to invest in education and infrastructure. South Dakota and Wyoming are at the bottom of the 50 states for education spending. Parents are concerned about the future education of their children, and it may be better to have children in a state where education is better funded.
Infrastructure also may not be the best in all of these states. Last winter, Texas ran into serious problems with its electrical grid as it was outdated and unprepared to withstand so much snow and cold weather. Plus, it wasn’t even connected to the US power grid.
Investments in infrastructure such as roads, bridges and power grids can help improve the economic status of everyone, not just those with higher incomes. This allows society to develop even more. There is a proverb: “The tide raises all boats.” As you invest in such essential projects and public services, you can help boost the economy by pushing more people to higher economic levels.
The final problem is that economic growth may not continue. At some point, it can move to another state or slow down. If this happens, taxes will have to be raised elsewhere.
Would you benefit from income tax-free living in the state?
Life in a state without income tax depends only on your finances. There are several factors that can influence your decisions. It would be nice if you thought it was worth it, so you will save money on your income. Understand that these states also impose other types of taxes to collect money.
Here are some factors to watch out for:
If you have a high income, you will save more money by not paying state income taxes. Income taxes levied on $ 100,000 in California will fetch over $ 6,400, but living in the state without income tax will save you that money instead.
High sales taxes may not affect people with higher incomes than people with lower incomes. By saving a hefty cut of income tax, you don’t have to worry about sales and property taxes.
If you are a humble person, you cannot go out and spend tons of money, preferring to keep the money in your checking account. In states like Tennessee, a 7% sales tax can be very costly for people who spend a lot of money. If you don’t spend a lot of money, you can save on sales tax.
You can also live close to a state that also has no sales tax. Living in Washington State, you can take advantage of no income tax and then travel to Oregon to avoid paying sales tax and save a significant chunk of taxes.
Since income tax is not conducive to generating income in these states, they should have higher property taxes. States such as New Hampshire and Alaska have some of the highest property taxes in the country.
To avoid some of these high property taxes, it would be best not to own the property. This can be difficult for those who love real estate, but owning real estate in high tax states may not be the best solution if you want to pay less taxes.
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Government services are not a priority
Most states use tax revenue to fund government services. If public services aren’t your biggest concern, these tax-free states can be a great place to visit.
With fewer taxes, infrastructure, education, and other public services will not be funded as much, and it simply is not a priority for these states. Some states have higher taxes in various sectors, such as Washington, on the gas tax that helps pay for roads, but public services will not be funded as well.
Final thoughts
Life in a state without income tax depends only on your finances. The tax rates levied on your income can affect the way you think about where you want to live and you will need to define your situation.
If spending money on groceries, gasoline, and many other groceries is what you spend most of your money on, then in these high sales tax states, you will have less money in your pocket. Reducing taxes on your high income is a priority than living in these states will help you financially.
After all, when less money is spent on taxes, you can use that money to invest more. You can try out new investments by investing in stocks, real estate or other investments with much more extra cash.
If you decide to move to one of these states, find out how other taxes are levied. You can save on income tax, but you might spend a lot more on others.
This post was originally published on Wealth of Geeks.