Are “Income Tax-Free States” a Better Investment Opportunity?
Paying taxes is always a tedious thing to do; that is why some Americans specifically look for tax-free states to call home, so they can avoid one of the biggest contributors to their annual tax bill, especially if they want to improve their finances. Although they can save money in one way by living in income-tax-free states, people are risking to pay more in other ways because losing revenue is usually compensated with other taxes. Keep reading to understand what it means to live in a tax-free state and if it can be financially beneficial to you:
Which Are the ‘Income Tax-Free’ States?
The following states are tax-free states:
Alaska - The state of Alaska has not had an income tax since 1980, despite several attempts to reinstate it.
Nevada - The state of Nevada doesn’t have a personal or corporate income tax. One reason for it is that Nevada brings a large source of revenue from gambling and tourism.
Florida - The state of Florida does not have a statewide personal income tax, but it has a corporate income tax.
Texas - The state of Texas doesn’t have an income tax, mostly because of its lawmakers and taxpayers who have fiercely fought to maintain this policy over the years.
South Dakota - The state of South Dakota hasn't had an income tax since 1943, but it has a variety of special taxes, such as alcohol occupational tax, precious metal and energy mineral severance tax, various licensing fees, and more.
Wyoming - The state of Wyoming doesn’t have a personal or corporate income tax, and it even has relatively low taxes overall.
Washington - The state of Washington has had for years a state income tax prohibition, despite a significant controversy over this policy.
Additionally, there are two more states in the USA that don’t have income taxes but they have tax dividend and interest income. These states are New Hampshire and Tennessee. Living in a state without income taxes means that people don’t have to pay taxes on their wages or income from Social Security, pensions, or retirement plans. However, taxpayers from these states have to pay other types of taxes, like local, property, or sales taxes.
How Does Living In an Income Tax-Free State Affect You?
For some, living in an income tax-free state is a dream come true. However, there are some factors that should be considered, which can make it less beneficial for some people. These factors are:
1. Higher rates for other taxes - States without income tax still have to generate tax revenue, and the way they do it is through higher property taxes, sales taxes, and excise taxes.
2. Overall cost of living - Besides paying higher rates for other taxes, the cost of living can be higher than in some states with income taxes. Taxpayers in these states typically pay more for housing, healthcare, gas, college tuition, utilities, and food.
3. Quality of life - Some states without the revenue from income taxes don’t invest as much in important initiatives like education or culture. The job market can be scarce, and the state’s economic health and political standing can also impact the quality of life.
Should You Live In a State With No Income Tax?
It all depends on your lifestyle and circumstances. To accurately determine whether it’s financially beneficial for you to live in such a state, you should consider some of these points:
1. Are you planning to buy a property? If you’re not planning on owning a property in one of these states, then you won’t have to pay high property taxes. However, you still might have to pay higher rental costs.
2. Is public education a priority for you? This mostly applies to people with children. Since some of these states have lower public funding, this can be a deal-breaker because their children's education might suffer.
3. What are your spending habits? If shopping is one of your largest expenses, then living in a state with high sales taxes is not particularly attractive or advisable.
Conclusion
Living in an income tax-free state can be an excellent financial opportunity for some people; however, it is vital to determine whether you will actually save money by not paying income taxes. When trying to determine an individual living budget, you should use your annual net income. If the cost of living is unaffordable, let alone the tax bill, then it’s necessary to avoid such a decision or correct your course.
Do you need help understanding the nuances of living in a tax-free state? For more information, you can reach us at info@cbi-commercial.com.