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Living in a State With No Income Taxes: Advantage and Disadvantage

Living in a State With No Income Taxes: Advantage and Disadvantage
Governments receive funding from income taxes. (Source: Pixabay)

Every American has to pay federal income taxes, and some people also have to pay a separate state income tax. As of 2023, only Alaska, Florida, Nevada, New Hampshire, South Dakota, Texas, Tennessee, Washington, and Wyoming don’t have any extra income tax.

At first glance, it may seem like there’s no reason to reside in a state with an income tax because it just adds more money to your budget. But living in a state with certain tax advantages has both pros and cons.

Living in a State With No Income Tax: Advantage and Disadvantage

Income taxes are used to pay for government obligations, provide goods for citizens, and finance public services. (Photo: shutterstuck.com)

Advantage: You’ll only need to pay federal income taxes.

The highest tax bracket for federal income is 37%. If you fall into that bracket, you’ll already be giving the federal government a big chunk of your money. When you add in state income taxes, especially in a high-tax state like California, your total income taxes bill can go up to more than 50%. With rates like that, some high-income people will leave high-tax states like California for tax-free states like Texas.

Disadvantage: Other income taxes might be higher.

States that don’t have income taxes aren’t all rich and kind because they don’t have income taxes. They just have a different way of bringing in money. Since these states don’t get any money from income taxes, they have to get that money from somewhere else.

Most of the time, this means that sales taxes, property taxes, and/or gas taxes go up. For instance, at 1.89% and 1.6%, New Hampshire and Texas homeowners pay some of the highest property taxes in the country. At 49.4 cents per gallon, Washington has the third-highest gas tax in the country.

You may not be required to pay state income tax, but depending on how you live, your total tax bill could end up being higher. For example, if you don’t own property and take public transportation, your tax bill is likely to be much lower. But if you own expensive property and drive a car that uses a lot of gas every day, your tax bill could be big.

Spending on infrastructure and education should be cut.
In some cases, when a state doesn’t have an income tax, it does bring in less money. In turn, this could mean less money for basic services from the government. The U.S. Census Bureau looked at how much each state spent on education in 2021 and found that South Dakota and Wyoming, both of which have no income tax, spent the least on education of all 50 states.

Other states that don’t have an income tax may cut spending in other areas, like infrastructure, to make up for it. As a resident, it will be up to you to decide if this trade-off is worth it.

Is it better to reside in a state that doesn’t tax your income?
All things considered, whether or not it’s better to reside in a state with no income tax depends in part on your own financial situation, but there are other things to think about as well. For example, the way you choose to live your life and the quality of life you have are also important.

From a strictly financial point of view, it’s important to remember that how much you make affects your taxes in a big way. For example, if you’re a single taxpayer in California making $1 million a year, your tax rate is a huge 13.3%. But if you make a low to moderate wage, even in California, tax rates are not that high. As with any financial question, there is no black-and-white answer to the question of whether it’s better to reside in a state with no income tax or not. It depends on a number of personal factors.

Read More:

2023 Tax Season: What Happens If You Don’t Pay Your Taxes?

Tax 101: All About FairTax – Eliminating All Federal Taxes and Replacing it with 30 Percent Nation Sales Tax

Tax 101: Federal Inheritance tax

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