People now approach their finances with greater caution as a result of the pandemic. Many people consider where they want to continue to live in order to save more money for things like school, retirement, or future medical care.
One such common move to save money is relocating to a state without a state income tax. Recently, many states have experienced a high increase in population owing to domestic migration. Among these states are Florida and Texas; these two no-income tax states have registered the highest net migration, with 220,890 and 170,307 people moving to these states, respectively. However, is it beneficial to move to these states?
Read on to learn more about income tax-free states, their revenue generation methods, and whether moving to these states actually helps you save money.
Seven out of nine of these states have absolutely no income tax, while New Hampshire and Washington fall into a gray area. Although earned income is exempt, dividend and interest income are subject to taxation in New Hampshire. In Washington, the capital gains of high earners are taxed.
If you make a lot of money, it can be advantageous to reside in a state where there is no state income tax because you can save more money this way. However, because the state still needs to raise money to support public education, road maintenance, and other state projects, they do so by levying high rates on other taxes, like property taxes, sales taxes, and so forth.
In the cases noted below, residing in a state with no state income taxes can help save you money:
According to each state's residency requirements, you may need to live there for a specific amount of time before you can establish residency there.
In Texas, for instance, you must reside there for at least a year before you can apply for permanent residency, which demonstrates you intend to stay. You must update the address on your state identification card, driver's license, and voter registration during this time in order to establish residency.
Some states also place a time limit on how long you can stay in another state, though this varies from state to state. For example, you cannot spend more than half of the year in New York if you want to claim residency in Florida.
Since there is no income tax in these states, other taxes are used to fill the revenue gap. Common examples of these taxes include fuel taxes, sales taxes, and property taxes. These factors may combine to increase your overall tax burden over what you might have paid in a state that taxes your income fairly.
For instance, property taxes are high in New Hampshire. As of 2020, Tennessee has one of the averages for both state and local sales taxes. Wyoming's natural resources are its main source of revenue. Oil exports mainly generate revenue for Texas and Alaska.
Some states also have distinctive sources of income. For instance, South Dakota levies an excise tax on cigarettes and more. Nevada derives its income from gambling, the tourist industry, and related fees.
You might not have a say in how much money you save if you move for work or school. However, it is a good idea to assess your tax liabilities.
When considering a move to a state with no income tax, you might want to think about a few things before deciding, especially if saving money is your only motivation.
Compare your current state's property, sales, and other taxes with income taxes to those levied in a state where there is no state income tax to see how much money you are spending on taxes overall.
Your lifestyle and spending patterns are major deciding factors in whether you should relocate to another state. Depending on your unique requirements, you must decide if living in a tax-free state will result in you saving more in taxes despite your lifestyle habits.
However, it is also important to keep in mind that if your income originates from another state that charges income tax, you might be subject to paying income tax. Your residency won't matter in these cases for tax savings purposes.
It appears likely that you will save money on taxes if you move to a state with no income tax. That isn't always the case, though. Don't forget to add up all the additional taxation methods the state employs that might have a negative impact on your bank account.
You might want to delay moving if there aren't many job opportunities in a tax-free state for you. However, if you earn a lot of money and don't intend to purchase real estate, these tax-free states could help you save a lot of money that you could use to fund other endeavors.