5 Financial Benefits of States with No Income Tax

Updated on August 1, 2022

Tax filing season is just around the corner. According to 2018 data, when it comes to state income taxes, the average amount of taxes paid is around $8,500 for individuals that file (data from CNBC). Currently, nine states do not pay any state income taxes: Washington, Wyoming, Florida, Alaska, South Dakota, Nevada, Texas, Tennessee and New Hampshire.

Depending on your situation, paying state income taxes could be a big expense or it could mean a big tax return after filing. I live in California where I have been paying state taxes since I can remember. My wife and I used to see a big tax refund before the Trump Act as we would be able to itemize our deductions for the heavy interest that we paid for our mortgage. In California, homes are not cheap, especially in the Bay Area where I reside. In order to offset the tax break we normally received in the past, my wife and I now deduct more state income taxes from our paychecks. Trump’s Act pretty much eliminated this tax break and now relies on a set of standard deductions to cover this mortgage interest.

In today’s article, we will explain some of the financial benefits that come with living in states that do not have income taxes. Hopefully, some of these benefits will help others decide whether a move to these states is worth it. Here is more information about each of the nine states.

Benefit #1: High-wage earners save much more money

If you have a higher paying job and/or live in a high-income household and want to save more money for retirement or other expenses, then there is definitely an advantage to relocating to one of these states. Imagine not having to pay thousands of dollars for state income taxes. That money can be used for a vacation or to put in the bank for another future purchase.

Benefit #2: Living in these states mean lower tax filing costs

Many tax preparers charge money to file taxes at the end of the year and charge per the amount owed or per the tax form filed to the state. With less forms used and/or less income tax to pay, the cost to pay these tax professionals decreases thereby adding a financial benefit that allows individuals to save more money. In my situation, we pay our tax preparer per the forms that she files with the state. There would be a significant savings if we lived in one of the nine states and the savings could be significant.

Benefit #3: These states often recruit new workers as they become areas of future growth

The financial benefits for young workers just out of college and/or training can be seen as more money can be saved to pay school loans instead of paying the state income tax. As first-time homebuyers, young professionals can also purchase property and use the money that normally would go to the state to put a down payment on a new home. They can also purchase a new vehicle with the money that they save.

Benefit #4: Retirees benefit financially by not having to pay for state-funded public services

Since most retirees would not have to rely on state services (such as public schools) since their offspring are already adults, there is likely a financial benefit of not having to pay the state income tax that would normally pay for these services.

Benefit #5: Retirees can often benefit from the “somewhat” lower cost of living from these states

Retirees can often benefit from a lower cost-of-living for two reasons: a) They are usually not high spenders and would not be susceptible to higher sales tax; and b) Property ownership is much cheaper than in most states such as California and New York.

As you can see, living in a tax-free state can be beneficial. Keep in mind that some of these states often find other ways to charge taxes, either through property ownership or sales tax, so it is up to individuals to conduct their own research before moving to one of these states.

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