No state income tax means you keep more of your wages, but you may pay more in other taxes

A state with no income tax does not take a percentage of your salary, wages, or investment earnings. Nine states have zero state income tax: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming, and New Hampshire (which taxes only dividend and interest income, not wages). If you live or work in one of these states, your employer does not withhold state income tax from your paycheck, and you do not file a state income tax return.

This does not mean those states collect no tax revenue. States without income tax typically rely on sales tax, property tax, excise tax on fuel and alcohol, and business taxes to fund schools, roads, and services. The total tax burden — what you actually pay across all types of taxes — can be higher, lower, or roughly the same as a state with income tax, depending on how much you earn, what you buy, and whether you own property.

Key Takeaways

  • Nine states collect no income tax on wages, so you will not see a state withholding on your paycheck or file a state return.
  • States without income tax make up the difference with higher sales tax, property tax, or both, so your total tax bill may not be lower.
  • If you move to a no-income-tax state mid-year, you may still owe tax to your previous state on income earned while you lived there.
  • Investment income, retirement withdrawals, and business income are treated differently depending on the state, even in states with no income tax.

How no-income-tax states replace that lost revenue

Sales tax is the most visible replacement. Texas, Washington, and Tennessee have sales tax rates between 8 and 9.5 percent, meaning you pay that percentage on most purchases. A family that spends $50,000 a year on taxable goods pays $4,000 to $4,750 in sales tax alone. Over a lifetime, a high-spending household in a no-income-tax state can pay as much or more in total state tax than a household in a state with income tax.

Property tax is the second major source. Florida and Texas have no income tax but charge property tax on real estate. The rate varies by county, but a home worth $300,000 might carry $3,000 to $6,000 in annual property tax. If you rent, you do not pay property tax directly, but landlords factor it into rent.

Some states use both. Washington has no income tax and a 6.5 to 10.25 percent sales tax depending on the county. Alaska has no income tax and no sales tax but collects oil revenue and charges property tax in some areas. New Hampshire taxes only investment income, not wages, but has a 5 to 6 percent sales tax and property tax.

What happens to your paycheck in a no-income-tax state

Your employer will not withhold state income tax. Your federal tax withholding stays the same — that goes to the IRS, not the state. You will see the federal withholding on your pay stub under "FIT" or "Federal Income Tax Withheld," but no line for state tax.

At the end of the year, you file a federal return with the IRS. You do not file a state return in a no-income-tax state. If you worked in multiple states during the year, you may need to file returns in the states where you earned income, even if one of them has no income tax.

Moving to a no-income-tax state mid-year or after retirement

If you move from a state with income tax to a state without it, you typically owe tax to your old state only on income earned while you lived there. If you earned $40,000 in your old state from January through June and then moved, you owe tax on that $40,000 to your old state. Income earned after you move belongs to your new state.

The tricky part is proving when you moved. Keep documentation: a lease or deed dated after your move, a utility bill showing your new address, or a driver's license with the new state. Your old state's tax authority may ask for proof that you actually left.

Retirees drawing from pensions or retirement accounts should check the rules in their new state. Some no-income-tax states exempt military pensions or public employee pensions from tax. Others tax all retirement income equally. Tennessee and New Hampshire, for example, do not tax retirement income at all, which is why some retirees move there specifically.

Investment income and business income in no-income-tax states

Most no-income-tax states do not tax capital gains, dividends, or interest either. If you sell stock for a $10,000 profit in Texas, you owe federal capital gains tax but no state tax. The same applies to bond interest or dividend income.

New Hampshire is the exception: it taxes interest and dividend income at 5 percent but not wages or capital gains. If you live in New Hampshire and earn $500 in dividend income, you owe $25 to the state.

Self-employed income is not taxed as income in no-income-tax states, but you still owe federal self-employment tax and federal income tax. Some states without income tax do charge a business license fee or franchise tax on certain types of businesses, so check your state's rules if you are starting a business.

Comparing total tax burden across states

Whether a no-income-tax state saves you money depends on your personal situation. A high earner who rents and buys little may pay less total tax in Texas than in California. A retiree living on investment income may pay less in Florida than in New York. A family that owns a home and spends heavily on goods may pay more in total tax in Washington than in Oregon, despite Oregon's income tax.

The only way to know is to calculate your own numbers. Add up what you would pay in state income tax, sales tax, and property tax in both states, then compare. Many tax software programs let you run this comparison, or you can contact your state's tax authority for a rough estimate.

Frequently Asked Questions

Do I still pay federal income tax in a no-income-tax state?

Yes. Federal income tax is separate from state income tax. You pay federal tax no matter where you live. A no-income-tax state only removes the state portion of your tax bill.

If I work in a no-income-tax state but live in a state with income tax, which state do I owe?

You typically owe tax to the state where you live, not where you work. Most states tax residents on all income, regardless of source. Some states offer a credit for taxes paid to another state to avoid double taxation. Check your home state's rules.

Can I move to a no-income-tax state to avoid taxes?

You must actually move and establish residency. straightforward claiming you moved without changing your address, getting a new driver's license, or renting a home will not work. States audit residency claims, especially for high earners. The move must be real and documented.

Does no state income tax mean lower overall taxes?

Not necessarily. Sales tax and property tax can add up to the same amount or more than income tax, depending on your spending and property ownership. A person who earns $100,000 and spends $60,000 a year may pay less total tax in a no-income-tax state, while someone who earns $100,000 and spends $100,000 may pay more.

What about Social Security and retirement income in no-income-tax states?

Most no-income-tax states do not tax Social Security benefits. Some exempt certain pensions or retirement account withdrawals. Tennessee and New Hampshire do not tax retirement income at all. Check your specific state's rules before moving.