States With High, Low, and No Income Taxes

Except for specific individuals who are exempt, the majority of us have to pay federal income taxes. What we pay is based on our yearly income, which determines the tax bracket we fall under. In addition to paying taxes to Uncle Sam, you may also have to pay state income taxes. The amount you pay in state income tax is dependent on where you live, with state tax rates ranging from zero to 13.3 percent.

Does my income tax change if I am self-employed vs. an employee?

Those who are self-employed – either as a sole proprietor, partner in a partnership, or member of an LLC or S corporation - can take advantage of several tax breaks. But one area in which they don’t get a break is with self-employment tax, which is a federal tax.

The good news is that there are no self-employed state taxes. Therefore, your self-employment tax will be the same no matter where you live. 

The self-employment tax (also referred to as SECA) includes Social Security tax and Medicare tax. Of note, FICA tax is Social Security/Medicare tax on employment, while self-employment tax is Social Security/Medicare tax on self-employment. 

Employers pay half of the FICA tax on behalf of their employees, while those who are self-employed must pay the full amount of Social Security/Medicare tax on their self-employment income. For the 2019 tax year, that rate is 15.3 percent on the first $132,900 of net income, plus 2.9% on net income above $132,900.  

Lowest income tax states in the U.S.

When considering where to live or relocate, understanding the tax burden in different states is crucial. Tax burden encompasses various forms of taxation, including income tax, sales tax, property tax, and more. Some states are known for their favorable tax policies, making them attractive options for individuals and businesses alike. Here, we explore the states that consistently rank low in overall tax burden.

Top 10 Lowest Income Tax Rates by State

1. North Dakota: 2.9% for individuals earning over $445,000.
2. Pennsylvania: 3.07% flat income tax rate for all filers.
3. Indiana: 3.15% flat income tax rate for all filers.
4. Michigan: 4.25% flat income tax rate for all filers.
5. Arizona: 4.5% for individuals earning over $250,000 and joint filers earning over $500,000.
6. Colorado: 4.4% flat income tax rate for all filers.
7. Ohio: 3.99% for individuals earning over $115,300.
8. Mississippi: 5% on income over $10,000.
9. Missouri: 5.4% on income over $8,700.
10. Arkansas: 4.9% for individuals earning over $84,500.

These states provide a significant advantage for residents who want to keep more of their income, especially compared to states with higher income tax rates.

Highest income tax states in the U.S.

When it comes to taxes, not all states are created equal. Some states impose significantly higher tax rates than others, impacting residents' take-home pay and overall cost of living. Understanding which states are the highest taxed can help individuals and businesses make informed decisions about where to live and work.

Key Factors Contributing to High Taxes

Several factors contribute to a state's overall tax burden. These can include:

• Income tax rates: States with progressive income tax systems often have higher rates for higher earners.
• Sales tax: States may impose high sales tax rates on goods and services, adding to the overall tax burden.
• Property tax: Local governments often rely on property taxes, which can vary widely from state to state.
• Additional taxes: Some states have unique taxes, such as estate taxes or excise taxes, that can further increase the tax burden.

These factors combined can create a challenging financial landscape for residents in high-tax states.

Top 10 Highest Income Tax Rates by State

1. California: 13.3% for individuals earning more than $1 million. A 1% surcharge for mental health services applies to this income bracket.
2. Hawaii: 11% for singles earning over $200,000 and couples earning over $400,000.
3. New York: 10.9% applies to individuals earning more than $1,077,550 and couples earning more than $2,155,350.
4. New Jersey: 10.75% on income over $5 million.
5. Oregon: 9.9% for single filers earning over $125,000 or joint filers over $250,000.
6. Minnesota: 9.85% for individuals earning more than $164,400 and couples more than $273,470.
7. District of Columbia: 10.75% on income over $1 million.
8. Vermont: 8.75% for individual incomes over $204,000 and joint incomes over $243,750.
9. Iowa: 8.53% for individuals earning more than $75,420.
10. Wisconsin: 7.65% on individual incomes exceeding $263,480 and joint filers above $351,310.

States That Have No Income Tax

Living in a state with no income tax can be an attractive option for many individuals and families looking to maximize their earnings. These states often appeal to those who want to keep more of their hard-earned money, especially in a time when the cost of living continues to rise. Below, we explore some of the key benefits of living in these states, as well as a list of the states that currently do not impose an income tax.

Benefits of Living in No Income Tax States

Choosing to reside in a state without an income tax can offer several advantages:

• Increased disposable income: Without state income tax, residents can retain a larger portion of their earnings.
• Attractiveness for businesses: States with no income tax often attract businesses, which can lead to job growth and economic development.
• Potential for lower overall tax burden: While other taxes may exist, the absence of income tax can make the overall tax situation more favorable.

Additionally, these states may offer a more appealing environment for retirees and remote workers who prioritize financial flexibility.

List of States Without Income Tax

As of now, the following states do not levy a personal income tax:

• Alaska
• Florida
• Nevada
• South Dakota
• Texas
• Washington
• Wyoming

Each of these states has its own unique characteristics and lifestyle offerings, making them popular choices for those seeking a tax-friendly environment. It's important to consider other factors, such as property taxes and sales taxes, when evaluating the overall tax landscape in these states.

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Does the tax burden change for states with lower income tax?

The answer is no, not necessarily. Your tax burden is not just federal and state income taxes. It also includes property taxes, sales tax, and other local taxes. States with lower income tax rates may have higher property taxes or sales tax. Texas is one example, which has no income tax, but it’s residents have to pay the sixth highest property tax rate (1.86 percent) in the country.

Looking at state income taxes is certainly one consideration when deciding which state you’d like to live and work in. However, it’s only one of many other expenses which factor into the cost of living in any state.