Moving to States With No Income Tax: Everything You Need to Know

No one likes paying income tax. It directly impacts your take-home pay. Although federal income tax is inescapable, state income tax is not.

States with no income tax are becoming more attractive to Americans every year. Forbes used IRS migration data to reveal over 3.1 million net U.S. citizens relocated to states without income tax between 2011 and 2018. The millions of people who moved represent more than $235 billion in annual income.

And these states without income tax intend to preserve their draw. Texas went as far as to amend their state constitution in 2019 to bar income tax from ever becoming a danger. And as of January 1st, 2021, Tennessee has eliminated the last bit of income tax from their state.

It may seem like a no-brainer to move to a state without income tax; who wouldn’t want to save a few bucks? While these states can provide some personal financial gains, the benefits of income-tax-free states are not always clear-cut.

States with no income tax

There are eight states without income tax:

• Alaska
• Florida
• Nevada
• South Dakota
• Texas
• Washington
• Wyoming
• Tennessee (Hall income tax phased out Jan. 2021)

Aside from these states:

• New Hampshire also exempts their citizens from earned income tax. But the state still levies 5% taxes on income from interest and dividends.

Why move to states without income tax

The benefit of moving to a state with no income tax is straightforward—you don’t have to pay state tax on your income. For people with higher incomes, this is a valuable benefit.

Unlike sales or property taxes, income tax is usually based on how much you make. If you make over a certain amount, you’ll usually pay more income tax. Therefore, if you live in a state without income tax and make a high income, then you’re generally not paying more in taxes than state residents with lower incomes.

States with no income tax are also helpful for retirement income. If you move to a state without income tax, those laws should also extend to your retirement fund.

But states with no state tax have some pitfalls

There are a few reasons why moving to a state without income tax isn’t always beneficial. The first and main reason is that the level of benefit in moving to one of these states is directly tied to your level of income. If you don’t make a high income, then paying no income tax is less helpful.

States without income tax still need tax money, so they get that money through other taxes, like property and sales taxes. As a general rule, states with no income tax have much higher property and sales taxes.

So if you move to a state with no income tax but don’t make much money, then the money you do make might not go as far. Due to the higher sales taxes, you’ll be paying more for goods and services in the state. And if you want to own property, then the chances are you’ll also have to pay a higher property tax.

Aside from income concerns, you could still be subject to an income tax even if you live in a state without one. If you make money from a business that’s located in a state with income tax, then you could still be liable for taxes in that state.

Moving to a state with no income tax

The hustle and bustle of relocating to a new state can take its toll outside of tax implications. When you’re moving there’s a ton of things to take care of, so keep these important tips in mind.

Check what’s needed to be considered a resident of the new state. Getting residency in a new state isn’t always easy. And if you’re moving to a new state for tax purposes, then it can be very tricky. CNBC reports tax auditors usually have many questions for people in this situation, so it’s a good idea to do your homework. Make sure you satisfy the requirements that will allow you to free yourself from tax obligations in your previous state of residence.

Find reliable movers, if needed. Unless you already live on the border of a state with no income tax, chances are you’ll need a moving company for your relocation. There are plenty of moving companies to choose from, but not all will be able to fit your needs, especially if you’re moving across the country. Have a clear idea of the moving services you’ll need, and match those needs with a trusted moving company.

Prepare for the move. Moving to a new state takes much more preparation than just moving across the city. Plan it out as much as you can before getting started. What can you throw out? How much can you move yourself? How will your pets travel to the new location? All of these are important considerations when making the big move.

Set up finances with new taxes in mind. If you’re moving to one of the states with no income tax, the taxes on sales and property will probably be high. It’s a good idea to refocus your finances to account for the shift in taxes, and try to maximize your personal assets in the new state.

The bottom line

States without income tax still need taxpayer money, so these states usually have higher taxes in other areas. People with larger incomes benefit the most from moving to a state with no income tax. Make sure you understand the taxes in your prospective new state, as well as your own financial situation before planning the move.