While individuals and businesses in all 50 states pay federal income tax, residents in 41 states also pay state income tax.
Seven states have no state income tax at all. In addition, the states of New Hampshire and Tennessee tax only the interest and dividend income of their residents gained from financial investments.
Most Americans should file a state income tax return in addition to a federal income tax return. Everyone pays federal income taxes. How much you pay depends on how much you earn, also known as your tax bracket.
On the face of it, states without an income tax have strong appeal. Proponents say higher paychecks for workers make it easier for states to create jobs and retain an educated workforce.
If you live in a no-income-tax state — or you’re considering moving to one — you’ll have to dig a bit deeper into the state’s tax code to gain a true sense of how these other taxes affect your finances.
In Washington, for example, the Institute on Taxation and Economic Policy calculates that the poorest 20% of state residents pay 16.9% of their annual income in sales and gas taxes, compared with just 2.4% for the wealthiest 1% of residents.
States with no income tax:
- South Dakota
States with nearly no income tax:
- New Hampshire