Nine states collect no income tax on wages or salaries
Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming, and New Hampshire do not tax wages or salaries. New Hampshire also taxes interest and dividend income but not wages. These nine states fund government operations through sales tax, property tax, excise tax on specific goods, and other revenue sources instead.
The absence of income tax does not mean these states are tax-free overall. A resident of Texas still pays sales tax on purchases, property tax on real estate, and federal income tax to the IRS. The difference is that paychecks are not reduced by a state income tax withholding.
Some people relocate to these states specifically to avoid state income tax, particularly high-income earners and retirees. However, moving for tax reasons involves trade-offs: states without income tax often rely more heavily on sales tax, which affects lower-income households differently, and may have different property tax rates or public service funding levels.
Key Takeaways
- Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming, and New Hampshire have no state income tax on wages.
- New Hampshire taxes interest and dividend income but not wages, making it different from the other eight states.
- States without income tax fund services through sales tax, property tax, excise taxes, and other revenue sources.
- Living in a no-income-tax state does not eliminate all state taxes—you still pay sales tax, property tax, and federal income tax.
- Tax burden varies by state depending on your income level, spending habits, and whether you own property.
How each no-income-tax state funds government
Alaska relies heavily on oil revenue and a permanent fund dividend paid to residents, which reduces the need for income or sales tax. The state has no sales tax either, making it unique among the nine.
Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming all use sales tax as a primary revenue source. Sales tax rates vary: Washington has the highest combined state and local sales tax at around 10.2 percent, while Tennessee's combined rate is around 9.6 percent. These states also collect property tax, though rates differ by county and municipality.
New Hampshire funds government primarily through a 5 percent tax on interest and dividend income, plus property tax and a meals and rooms tax (similar to sales tax on restaurants and hotels). The state does not tax wages, which is why it appears on the no-income-tax list, but residents with investment income do pay state tax on those earnings.
Sales tax burden in no-income-tax states
Because these states do not collect income tax, they typically charge higher sales tax to replace that revenue. A person who spends heavily on taxable goods will pay more in sales tax than they would have paid in income tax in a high-income-tax state.
Sales tax applies to most retail purchases but not to groceries in most of these states. Alaska and Montana have no sales tax at all. Florida exempts groceries and prescription medications. Texas exempts groceries but taxes prepared food. Rules vary by state and sometimes by county, so the actual tax you pay depends on what you buy and where you live within the state.
For someone earning $100,000 per year, the tax savings from no income tax may be offset by higher sales tax if they spend a large portion of their income on taxable goods. For someone earning $40,000 per year who spends less, the sales tax burden may be lower overall than an income tax would be.
Property tax in states without income tax
Property tax rates vary widely among no-income-tax states and often depend on the county or municipality where you own property. Texas has a statewide average property tax rate around 1.8 percent of home value, while New Hampshire's average is around 2.2 percent. Within each state, rates can differ significantly by location.
If you plan to buy a home in a no-income-tax state, research the property tax rate in the specific county and school district. A state with no income tax but high property tax may not save you money compared to a state with moderate income tax and lower property tax.
Federal income tax still applies everywhere
Living in a state without income tax does not reduce your federal income tax. You still file a federal return with the IRS and pay federal tax on your wages, regardless of which state you live in. The only difference is that you do not file a state return or pay state income tax.
Self-employed people and business owners in no-income-tax states still pay federal self-employment tax and federal income tax. They may save on state income tax, but the federal obligation remains the same as it would in any other state.
Retirement income and investment income in no-income-tax states
Most of the nine states exempt retirement income from state tax. Social Security benefits, pensions, and 401(k) withdrawals are not taxed by Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, or Wyoming. This makes these states popular with retirees.
New Hampshire is the exception: it taxes interest and dividend income at 5 percent but does not tax Social Security, pensions, or 401(k) withdrawals. If you have significant investment income, New Hampshire's tax on interest and dividends may explore.
Capital gains (profit from selling stocks, real estate, or other assets) are not taxed by any of these nine states. In states with income tax, capital gains are sometimes taxed differently than wages, but in no-income-tax states, there is no state capital gains tax at all.
Other taxes in no-income-tax states
All nine states collect excise tax on specific goods, most commonly gasoline, alcohol, and tobacco. These taxes are built into the price you pay at the pump or store and are not listed separately on your receipt. Excise tax rates vary by state and by product.
Some states also collect business taxes, licensing fees, and taxes on specific industries. For example, Washington taxes capital gains above a certain threshold, though this is not an income tax on wages. Tennessee has a tax on certain types of business income. These taxes are narrower than a general income tax and affect specific groups rather than all wage earners.
Frequently Asked Questions
Do I have to move to a no-income-tax state to benefit from no income tax?
You must be a resident of the state to avoid its income tax. Residency is determined by where you live for most of the year, where you are registered to vote, and where your driver's license is issued. If you work in a no-income-tax state but live in another state, you typically pay income tax to the state where you live, not where you work.
Is it cheaper to live in a no-income-tax state?
It depends on your income, spending habits, and whether you own property. High earners usually save money because they avoid income tax entirely. Lower-income earners may pay more in sales tax. Property owners should compare property tax rates. The only way to know is to calculate your total tax burden in the state you are considering versus your current state.
Can I claim residency in a no-income-tax state if I work remotely?
Yes, if you establish residency there. You must live in the state for most of the year, obtain a driver's license, and register to vote. Your employer may still withhold taxes based on where you work, but you would file a state return in your state of residency. Some states have specific rules about remote workers, so check with the state tax authority.
Does Alaska really have no sales tax?
Alaska has no statewide sales tax, but some municipalities charge local sales tax. Juneau, Anchorage, and Fairbanks have local sales taxes ranging from 5 to 7.5 percent. Check the specific city or borough where you plan to live.
What happens to my state tax refund if I move to a no-income-tax state?
If you move mid-year, you file a part-year resident return in your old state for the months you lived there and a part-year resident return in your new state for the months you lived there. You do not file a state return in a no-income-tax state for the months you lived there. Your refund from your old state is based only on the income you earned while living there.