What to know about state income tax rates
The vast majority of states levy some form of tax on personal income, but each state’s approach varies. In 2022, eight states levy no individual income tax of any kind, and with the addition of New Hampshire in the coming years, that number will soon grow to nine. Taxpayers will encounter single-rate tax structures in some states and graduated-rate income taxes in others, as well as a wide range of income tax rates from zero in states that don’t levy income taxes to 13.3% in California, the highest state marginal individual income tax rate in the U.S. Income tax, however, only represents one slice of the whole state tax burden. Even in these states with no income tax, other taxes like sales, excise and property taxes can still affect an area’s affordability and tax friendliness.
Alaska is the most tax-friendly state in the country. In addition to being a state with no income tax, according to the Tax Foundation, Alaska boasts the lowest state and local effective tax rate in the country at 5.8% in 2019, the latest year for which economic data is available. Compared to New York’s state and local effective tax rate of 14.1%, it’s clear why Alaska is so desirable for the tax-conscious.
Making the move to Florida comes with multiple tax benefits, the first of which is that it’s one of nine states that do not tax income. In addition, Florida doesn’t levy a tax on inheritances, gifts or intangible personal property. Its state and local effective tax rate is one of the lowest in the country at 8.8% in 2019.
Though Nevada makes this list for its lack of a state income tax, overall Nevada’s state and local effective tax rate of 9.7% falls in the middle when compared with other states. It’s important to consider state taxes beyond income tax alongside other cost-of-living factors before making the move across state lines.
New Hampshire makes this list of states with no income tax because the state doesn’t levy a wage and salary tax. However, there’s one big exception residents need to keep in mind: New Hampshire does tax investment income and interest, unlike the others on this list. Those state taxes are set to phase out starting in 2023, however, making New Hampshire an entirely income tax free state by 2027.
South Dakota is an attractive state from a financial perspective for many reasons: no state income tax, desirable trust laws and a relaxed standard for establishing residency. And according to the Tax Foundation, the state ranks No. 37 for the highest state and local tax burdens in the country, falling on the lower end of effective state tax rates when forms of taxation like sales and property tax are considered.
As of Jan. 1, Tennessee has officially done away with taxes on investment income and interest, making this state an entirely free of income tax. Not only do residents of Tennessee avoid income tax, but people who call this state home benefit from one of the lowest effective state tax rates in the country: 7%, according to the Tax Foundation.
Texas, like the other states on this list, relies heavily on sales and property taxes to fund state services rather than an income tax — a fact that’s unlikely to change anytime soon, thanks to this state’s constitutional amendment banning one. To establish a personal income tax, two-thirds of the Texas House and Senate would need to vote to repeal the amendment and a statewide election would be called. As of 2019, its effective state tax rate sits at 8%.
Washington may appear to be a desirable state from a tax perspective, but don’t let the lack of a state income tax fool you. Of all the states on this list, Washington has the highest effective state tax rate at 9.8%, according to the Tax Foundation.
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