Have you ever noticed a large chunk of your paycheck disappear? You are not alone! While most people are used to this occurrence, there are nine states that have opted out of state income tax. But how are they able to do this? Let’s take a look.
But first, what is income tax? Income tax is a tax collected by the government on the money that people and businesses earn. It is usually a percentage of a person’s salary or a company’s profits that is meant to help fund public services like schools, roads, and healthcare. There are three main types that you may see. Personal income tax; is paid by individuals on wages and earnings, corporate income tax; is paid by businesses on profits, and capital gains tax; is a tax on profits from investments like stock, or real estate.
Here are the nine lucky states who do not have income taxes:
- Alaska
- Florida
- Nevada
- New Hampshire (no income tax, but taxes dividends & interest)
- South Dakota
- Tennessee (same as NH, but set to eliminate all income taxes)
- Texas
- Washington (recently introduced capital gains tax but no general income tax)
- Wyoming
Just because these states don’t tax your paycheck doesn’t mean they don’t need money. Instead, they get creative with other revenue sources. One example includes Florida and Nevada, as they rake in money from tourists through revenue from hotels, theme parks, and casinos. States like Texas and Tennessee make up for their lack of income tax by having higher sales and property taxes. Alaska uses natural resources, such as oil, to fund public services.
Since these states have no income taxes, businesses and new residents are attracted and choose to move to those states. Bringing in economic growth and boosting the overall tax base. You might be asking yourself, is it better to live in a no-income-tax state? It depends! While it does sound great, some of these states have higher property or sales taxes to compensate. Public services could also be funded differently compared to income-taxed states.
Income tax is not the only way states get revenue, it’s just one piece of the puzzle. Whether you look forward to tax season or not, it is always interesting to see how different states balance the books!
Smart tax planning throughout the year can save you thousands! If you’re unsure where to start, working with a tax professional or CPA can help you take advantage of all deductions and credits. Would you choose to move to a no-income-tax state? Let’s talk about it!
