Guide To Find US States With The Lowest Taxes
A primary reason for moving from one state to another is cost of living. Those who are approaching retirement may be considering spending the next phase of their life in a state that is more affordable. Even those who are mulling job offers from different states may want to know about the cost of living in each.
It is important to consider different factors when identifying the cheapest state to live in, especially if you are still working. As you use a moving cost calculator to determine the cost of completing a local or long-distance move, you would use cost of living comparison to decide where you should move.
A significant difference between the high cost of living and the low cost of living is the taxes you have to pay each year. State taxes can take out a significant chunk of your income, while many large cities also have city taxes.
Below is a guide that will help explain how to find the states with the lowest taxes in the United States, along with our findings on some of the states that present the lowest tax burden to residents.
Common State Taxes
Three of the most common taxes that a state can impose on a resident include personal income tax, property tax and sales tax. There are also other taxes you may want to consider when deciding on where to move, and these include corporate income tax, fuel tax, and inheritance and estate taxes.
1. Personal Income Tax
There are several states in the United States that do not charge any personal income tax. An income tax is taken out of a person’s salary if they live and work in the state.
There are currently seven states in the U.S. that do not charge any personal income tax.
- South Dakota
There are two other states that have a similar philosophy when it comes to income tax: Tennessee and New Hampshire. These states will not tax your earnings, which means you pay zero income tax out of your bi-weekly or monthly paycheck. However, these states will charge you income tax on interest and dividends, which means your investments are subject to income tax.
2. Property Taxes
All 50 states in the U.S. have one definition or another regarding property taxes. In some states, it is possible to tax land, buildings, homes, and apartment complexes. Some states even tax property such as cars, boats, planes, and bikes.
An individual who owns a home and a car in a state that taxes both would have to pay a state property tax each year on those properties. The property tax is usually a percentage of the value of the property.
Say you have a home that is worth $100,000 and the state has a property tax for homes of 1%. You would have to pay $1,000 in property tax every year to own your home.
The top five states in the United States for lowest property tax are:
- Louisiana (0.18%)
- Hawaii (0.26%)
- Alabama (0.33%)
- Delaware (0.43%)
- D.C. (0.46%)
Both midwestern and northeastern American states tend to have higher property taxes, with those states including Vermont, Michigan, Connecticut, New Jersey, New Hampshire, Texas, and Illinois.
3. Sales Tax
Sales tax is a tax the government can levy on any goods or services sold within the state. State taxes can come in the form of vendor taxes, consumer taxes and both vendor and consumer taxes, depending on who is expected to pay the tax on a particular transaction.
There are five states in the U.S. with no sales tax:
- New Hampshire
The final state on this list, Alaska, has no state sales tax. However, localities within the state may have their own sales tax, so you may find some larger cities have a sales tax.
Even if a state has a sales tax, it may be worth moving there, especially if it is low and is combined with a general low cost of living. For instance, Colorado has a 2.9% sales tax, Georgia is at 4%, and North Carolina is at 4.75%.
Studies from The Tax Foundation broke down the states with the highest average state and local sales taxes. These states are Tennessee, Arkansas, Louisiana, Washington, and Alabama. Each of them has sales taxes in the range of nine to ten percent.
4. Corporate Income Tax
Corporations may have to pay income taxes in the same way as individuals in some states. Most states do keep these taxes on the low side, as they want to attract business to their state.
Both Wyoming and South Dakota have no corporate income taxes, while North Carolina has 2.5%, North Dakota 4.31% and Colorado 4.63% corporate income tax rates.
If you are planning to move to a state and start a business, or expand your existing business to other states, it is worth comparing corporate income tax rates.
5. Fuel Tax
Fuel purchased within a state is taxed, depending on where in the U.S. you live. The disparity between state fuel taxes is significant, with some states being as low as 14 cents on the gallon, while others go up to 60 cents per gallon.
Alaska, Missouri and Mississippi have the lowest fuel tax rates, while Pennsylvania, California, and Illinois have the highest.
Fuel tax is worth considering when planning your move, but only if you plan to drive a lot every year. If you are making routine drips to and from work or other places close by, it is not going to make a significant difference in how much money you spend or save.
6. Inheritance and Estate Tax
Some states in the United States have a tax on inheritance and estates, as they mean to tax wealth when it is transferred from the owner to beneficiaries.
The good news is that most states do not have such a tax, with TurboTax claiming that only Maryland, Kentucky, Iowa, Nebraska, New Jersey, and Pennsylvania have an inheritance tax.
Frequently Asked Questions
How do I pay income taxes?
Depending on your profession, you will likely not have to do anything to pay income taxes when you move to another state. Most employers cut income tax from your paycheck automatically, leaving you with the post-tax amount every two weeks or month.
It is why you should be diligent in completing the relevant paperwork for filing state and federal taxes every year. If you work a job with an hourly or monthly wage, you are likely owed some money from the state and the federal government each year, as you may have “overpaid” taxes.
How is the property tax for home determined?
The property tax you have to pay in most states on your home is determined by the value of the home. It is a percentage of the home’s value, which is the cash or market value of the property.
There may be instances where you disagree with the value presented to you at the time taxes are due. If you do not believe your home’s cash value is accurate, you can contact the relevant agency to dispute the value.
When purchasing a product online, how is sales tax calculated?
When you are buying a product online, you are paying sales tax based on where the delivery is being made. Someone who is buying a product off an online retailer in California would pay the relevant state sales taxes on that item when they complete the order.
Choosing a State to Live
While the cost of living is a key factor in choosing where to live, it is not the only basis for your decision. Ideally, you should find a balance between great job opportunities, thriving cities and local communities, cost of living, property values, school quality and more.
Those who are retiring or approaching retirement would give greater weight to the cost of living and would care a lot about how much tax they would pay when moving to a state.
If you are retiring with a significant nest egg, it will go a lot further in a state with lower property prices and taxes. You could enjoy a higher standard of living on a more spacious property, compared to living in a city with high rents/home buying prices and taxes.
If you are still at an age where you plan to work for another decade or two or three, you must be more strategic in your decision. Weigh up state and local taxes with other factors, such as school quality, property value trends, and average salaries in your chosen profession.
Someone who earns $25,000 a year in a low tax/cost of living state is not necessarily better off than a person who earns $100,000 in a high tax/cost of living state.
When you have made a decision on where to live, accepted a job offer, and found your ideal home or apartment, it is time to think about moving. One of the best ways to complete a local or long distance move is with the help of moving professionals.
Use relevant online resources to find the best local movers and determine the cost of your move. A moving cost calculator is very helpful for figuring out how much you would spend in getting all your possessions packed, boxed and driven to another state.