Where Can You Live Without Paying State Income Taxes?

By    June 18, 2013

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You love paying income taxes, right? If you answer yes to that question, then you need to have your head examined. No one I know loves to see taxes deducted from their paychecks. And with all of the news lately about the IRS targeting certain conservative groups, even more people are fuming about forking over money to the government.

So, what if you could move somewhere in the U.S. where you could skip paying income taxes altogether? Good luck finding it. That place doesn’t exist (unless you don’t make enough taxable income or you’re hiding from Uncle Sam).

However, there are seven states where you don’t have to pay a single penny in state income taxes:

  1. Alaska
  2. Florida
  3. Nevada
  4. South Dakota
  5. Texas
  6. Washington
  7. Wyoming

New Hampshire and Tennessee don’t tax your pay, but they do collect taxes on dividend and interest income.

Why are these states so tax-friendly? Alaska, for one, can afford not to impose state income taxes because it rakes in so much money from the oil industry, according to my friend Kay Bell, a personal finance writer who concentrates on taxes. Meanwhile, Florida and Texas depend heavily on sales and property taxes.

Bottom line No. 1: The nine states that don’t tax your wages find other ways to generate revenue. Bottom line No. 2: Living somewhere that doesn’t collect state income taxes could be just a psychological advantage, as you wind up paying the government one way or another.

Investopedia.com offers this note of caution: “The grass can always seem greener on the state tax-free side of the fence, but if you dig a little deeper you might find that your own state suits you better—even if you do have to pay a little bit more come tax time.”

Still, living in one of these nine states can be enticing—especially if you’re well-to-do. For 12 years, I lived in income-tax-free Texas before moving last year to income-tax-dependent California. In the Golden State, I certainly noticed the bigger tax bite in my paycheck. This spring, I moved back to the Lone Star State and was delighted to, once again, be free of state income taxes. My paycheck appreciated it, too. But I don’t know whether I’m behind or ahead of the tax game after returning to Texas.

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NBA star Dwight Howard may appreciate the lack of a state income tax in Texas as well. Speculation is that Howard will be jumping from the Los Angeles Lakers in California, which has an income tax, to the Houston Rockets in Texas, which has no income tax. If Howard does head to the Rockets, he could save about $15.1 million in state income taxes on his next contract, according to Forbes.com. Geez, $15,000 extra in my pocket would be just fine with me.

Texas Gov. Rick Perry, whom Forbes.com called the state’s “Top Cowboy,” is speaking to the Dwight Howards of the world—as well as business tycoons—in his current campaign to lure people and jobs from the New York City area to income-tax-free Texas.

Forbes.com contributor Travis Brown argues that the allure of relocating from New York to Texas revolves around what my state does not offer, including state income taxes. “The Lone Star economy speaks best when you forget the spin and simply follow the facts,” he wrote.

Fittingly, Brown employed an NBA analogy when making the case for living in states without income taxes: “The race for the best workforce in America is on, and we are all watching the Spurs and the Heat play their NBA finals from two states completely without a state income tax. Florida and Texas are now playing in an entirely different arena, and it is time for the rest of America to follow their lead.”

Whether you agree or disagree with Brown, it sure is less taxing for me when my paycheck has zero state income taxes.

John is editor of The SpareFoot Blog. He first moved to Austin in 1999, when downtown Austin wasn't nearly as lively as it is today. John's loves include pizza, University of Kansas basketball and puns.

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