It’s no secret we’d all love a lower tax bill, right? One (maybe bold) way some folks do this: Moving to one of the states with no income tax. This set up may seem very appealing – after all, a lower tax bill could mean more money to spend, save or invest.
While not having to pay state income tax sounds nice, it’s also worth noting: Living in a state without income tax doesn’t necessary mean that your cost of living will be lower or that you’ll always pay less taxes overall.
We’ll go over some things to consider if you’re thinking about shifting your home base. The bottom line: It’s a good idea to run all the costs before committing, so you’re not surprised later.
OK, we won’t dangle the carrot in front of you any longer. There are currently (as of June 2021) eight states in the US with no income tax: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington and Wyoming.
If you’ve always dreamt of living in one of those states, great! You can look at no state income tax as a bonus.
But if your reason for moving to one of these states is just so you don’t have to pay state income tax, keep in mind that there may be other trade-offs, like higher sales tax or an overall higher cost of living. We go over some of these ahead.
In addition to the eight states without income tax, there’s another state that doesn’t tax earned income: New Hampshire. Now you might be wondering: how is that any different from the states we’ve already covered?
While New Hampshire doesn’t tax earned wages, it does tax interest and dividends earned on investments (hence, the specification of “earned wages” as opposed to all income).
New Hampshire residents get taxed 5% on income from interest and dividends.
Obviously no state income tax could potentially lower your tax bill. But there are a few other factors you may want to consider, like:
No state income tax doesn’t guarantee a state is more affordable. In fact, of the seven US states without income tax, three of those states – Washington, Nevada and Alaska - ranked as the top 15 most expensive US states to live in 2020, according to Reader’s Digest.
In determining the states’ affordability, RD looked at things like housing, healthcare, food, and even gas prices.
While no state income tax may sound great, that lower tax bill might not be worth it if you’re getting paid drastically less overall.
It’s worth noting that of the states we’ve mentioned without income tax, three of them – Nevada, Tennessee, and Florida – are also on the list of states with the lowest median incomes, per Business Insider in 2019.
Of course, pay will vary by industry (and your benefits package might add value, too). It’s also worth noting that if you work remotely, even if you’re moving to a state that has no income tax, you may still be subject to state income tax from the state your company is based in.
With that in mind, it’s worth looking into the specifics regarding your job and location. Either way, it’s a good idea to do some research before you commit and see how the numbers and benefits compare.
Just because there’s no state income tax doesn’t necessarily mean you’ll pay less in taxes across the board. According to the Tax Foundation, in 2021 four of the states without income tax are also among the top 15 states for highest average combined state and local sales taxes.
For example, Washington state’s average combined sales tax of 9.23% is the fourth highest in the country. Nevada comes in at #13 for highest average combined sales tax (8.23%), and Texas comes in at #14 with an average combined sales tax of 8.19%.
So a potentially higher sales tax may be something to consider when you’re planning your grocery/clothing/dining/almost anything budget.
States that don’t charge a state income tax may have less money to invest in social services – think education, healthcare, even infrastructure like bridges and parks.
So if you have kids, for example, it might be worth checking out some of the options (and costs) of schools ahead of time. Ditto for scoping out healthcare costs as well as your potential proximity to healthcare services.
United Capital Financial Advisers, LLC d/b/a Goldman Sachs Personal Financial Management (“GS PFM”) is a registered investment adviser and an affiliate of Goldman Sachs & Co. LLC and subsidiary of The Goldman Sachs Group, Inc., a worldwide, full-service investment banking, broker-dealer, asset management, and financial services organization.
The information contained herein is intended for informational purposes only, is not a recommendation to buy or sell any securities, and should not be considered investment advice. GS PFM does not provide legal, tax, or accounting advice. Clients should obtain their own independent legal, tax, or accounting advice based on their particular circumstances. Please contact your financial adviser with questions about your specific needs and circumstances.
Information and opinions expressed by individuals other than GS PFM employees do not necessarily reflect the view of GS PFM. Information and opinions expressed in this article are as of the date of this material only and subject to change without notice.
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