Feb 24 2020

States That Don t Tax Earned Income, income tax income tax.

#Income #tax #income #tax

7 States With No Income Tax

Income tax income tax

The Internal Revenue Service isn t the only tax entity with a hand out for a piece of your paycheck. Most states – 41 in all – impose a broad-based individual income tax. Only seven lack an income tax altogether: Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming. Tennessee and New Hampshire fall into a gray area. They tax only dividend and interest income, not earned income.

Tennessee Will Become the 8th Tax-Free State

Tennessee is gradually reducing its Hall tax on interest and dividend income.

The state s 6 percent Hall tax rate reduced to 5 percent in 2016, and the rate will continue to drop in one percent increments each year thereafter until the tax is completely eliminated in 2022. Until then, residents must only file income tax returns if they collect dividend and interest income totaling more than $1,250 for the year, or $2,500 if they re married and filing a joint return.

Alaska is the only other state to ever take legislative steps to eliminate an existing income tax.

New Hampshire s Income Tax

New Hampshire, the other state that doesn t tax earned income, only requires that residents file a tax return when they have interest and dividend income in excess of $2,400, or $4,800 if they re married and filing jointly. An additional $1,200 exemption may be available for certain taxpayers who are age 65 or older, disabled or blind.

Income Earned in Other States

There s a caveat, of course – there almost always is when it comes to taxes.

If you live in a state that does levy an income tax and you earn income in one of the tax-free states, you must still report that income on your home state tax return. And it works both ways. If you live in a tax-free state and earn income in a state that does tax earnings, you must file a non-resident return in that state.

Taxes on Retirement Income

Although 43 states impose some version of an income tax, 36 of them take it easy on retirees. Although the guy who s still punching a time clock might have to pay income tax, many seniors do not, at least if they stop working. Some of these states exclude all retirement income while others exempt only a portion.

Alabama, Arizona, Arkansas, California, Delaware, Georgia, Hawaii, Idaho, Illinois, Indiana, Iowa, Louisiana, Maine, Maryland, Massachusetts, Michigan, Mississippi, New Jersey, New York, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, South Carolina, Virginia, Wisconsin and the District of Columbia do not tax Social Security income. Kansas exempts Social Security income if your adjusted gross income from all sources is $75,000 or less.

Alabama, Hawaii, Illinois, Kansas, Louisiana, Massachusetts, Michigan, Mississippi, New York and Pennsylvania do not tax government pensions, although some reserve this perk for pensions earned in their own state. You might have to pay income tax if you earned a government pension elsewhere then moved into one of these jurisdictions when it came time to retire. Pennsylvania also exempts private-sector pension income, and Alabama does not tax income from defined benefit retirement plans.

Hawaii does not tax income from contributory retirement plans.

Will I Pay Less Taxes Overall in These States?

Before you plant a For Sale sign on your lawn and begin packing your bags to move to one of these tax-free states, keep in mind that they still need to raise revenue to function and they have to get that money from somewhere. States without an income tax often make up for the lack of these revenues in other ways, such as through higher property taxes, sales taxes, fuel taxes and other taxes. These can add up so you re paying more in overall taxation than you might in a state that does tax your income at a reasonable rate.

New Hampshire and Texas have some of the highest property taxes in the nation, although New Hampshire does not have a sales tax. Tennessee has one of the highest sales tax rates in the U.S. Washington will get you at the gas pump – its gasoline tax is exorbitant.

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Many of these states also have higher-than-average costs of living. That being said, most – but not all – of them failed to make the Tax Foundation s Top 10 list of states with the lowest overall tax burdens.

And here s another thing to keep in mind: You can claim a tax deduction for state income taxes you pay on your federal return if you itemize.

NOTE: Tax laws change periodically, and you should consult with a tax professional for the most up-to-date advice. The information contained in this article is not intended as tax advice and is not a substitute for tax advice.

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