Taxation Nation: Which State Taxes Matter to You?
Income, estate, property, sales—you name it, there's a tax for it. Except, that is, for those states that forgo such taxes in a bid to lure individuals and businesses.
"Whether you're a retiree, a remote worker, or just looking for a change of scenery, the idea of pulling up stakes for purportedly greener pastures isn't that unusual these days," says Hayden Adams, CPA, CFP®, director of tax and financial planning at the Schwab Center for Financial Research. "However, the tax implications can be profound, so it's smart to take a hard look before you break out the packing tape."
When thinking about relocating, taxes are only one of many factors to weigh, including climate, lifestyle, proximity to family, and the availability and quality of health care. "Taxes shouldn't be your first consideration," Hayden says. "So, if you wish to live by the beach or close to one of your kids, for example, figure out all the places you could live—then take a look at which taxes matter most based on your situation and stage of life."
High earners in their prime working years might gravitate toward those states that don't tax earned income—namely, Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. However, the picture is generally more complicated than that. "Florida's lack of an income tax may seem like a bargain, but property tax there is high, and the government raises the bulk of its revenue through state and local sales taxes," says Hayden, "That's why it's important to consider your entire tax burden."
Here's how all 50 states and Washington, D.C., levy income, estate, property, and sales taxes—along with guides to capital gains and Social Security taxes, and how to evaluate a state's trust laws.
Whether a state has an income tax can be an important factor—especially for those in the highest tax brackets who rely primarily on ordinary income from wages and retirement accounts (as opposed to long-term investment income).
According to data from the Tax Foundation,1 the states with the highest individual income tax collections per capita—excluding local taxes—are:
- New York ($2,656)
- Massachusetts ($2,477)
- Connecticut ($2,268)
- California ($2,135)
- Oregon ($2,038)
Such numbers, however, don't tell the whole story. Take Oregon: While the state taxes anyone making more than $125,000 at its highest rate of 9.90%, Oregon also allows taxpayers who make under $125,000 to deduct up to $5,950 of federal income taxes from their state income tax liability. In fact, it is one of only six states that allow you to deduct your federal taxes either partially (Missouri, Montana, and Oregon) or in full (Alabama, Iowa, and Louisiana) from your state income tax liability.2
And while Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, and Wyoming levy no personal income tax whatsoever, Washington does impose a 7% tax on the sale or exchange of long-term capital assets such as stocks, bonds, business interests, or other investments and tangible assets (see "What about capital gains?"). And New Hampshire doesn't tax income from wages, but it does tax dividend and interest income.3
Hayden also notes that using a tax-friendly state as your primary residence may not offer much tax benefit if you work part or full time somewhere else. Nonresidents of Colorado, for example, may be required to file a state tax return if they received income from a source in Colorado or spend even a single day working there.
"Even if you're in your vacation house too long, some states might want a cut," Hayden says. "And certain states, including California and New York, can be extremely aggressive about going after income taxes. Some can go so far as to check social media to see where you've been spending time."
What about capital gains?
The federal government taxes short-term capital gains (on assets held for a year or less) at the same rate as your ordinary income, and long-term capital gains at 0%, 15%, or 20%, depending on your tax bracket.
In addition, a majority of U.S. states levy capital gains taxes, with rates ranging from 2.90% to 13.30%.4 The states with no additional state tax on capital gains are Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, and Wyoming. (Visit your state's tax website for more details.)
"That said, these rules change frequently as states compete for business and investment," says Hayden Adams, CPA, CFP®, director of tax and financial planning at the Schwab Center for Financial Research, "so be sure to check with a tax advisor who is familiar with the relevant state and local tax laws."
Depending on where you live, property taxes can account for as much as 63% of state and local tax collections (hello, New Hampshire).5 What's more, such taxes can rise alongside home values. "This is of particular concern to those on a fixed income," Hayden says. "Will you be able to keep up with property taxes as your home value increases? Typically, higher property values mean higher property taxes."
To compare states, homeowners should look at the effective property tax rate, which is total property taxes paid divided by total home value.
Using 2020 data from the Tax Foundation's report,6 the states with the highest effective property tax rate are:
- New Jersey (2.21%)
- Illinois (2.05%)
- New Hampshire (1.96%)
- Vermont (1.82%)
- Connecticut (1.76%)
Whereas the states with the lowest effective property tax rate are:
- Hawaii (0.31%)
- Alabama (0.39%)
- Colorado (0.54%)
- Louisiana (0.54%)
- West Virginia (0.55%)
To put those figures in perspective, a homeowner in New Jersey whose property is valued at $400,000 would pay $8,840 in property taxes ($400,000 x 2.21%), whereas a homeowner in West Virginia with an identical property value would owe only $2,200 ($400,000 x 0.55%).
Since property taxes are determined by local (not state) jurisdiction, it's best to check with a specific city or county for its property tax rates.
Of all the taxes we pay, sales taxes are typically the easiest to understand. After all, they're right there on the receipt—though not in Alaska, Delaware, Montana, New Hampshire, and Oregon, which dispense with statewide sales taxes altogether. (Of these, only Alaska allows localities to charge sales taxes.)7
The highest per capita local sales tax collections occur in:
- Louisiana (9.55%)
- Tennessee (9.55%)
- Arkansas (9.47%)
- Washington (9.29%)
- Alabama (9.24%)
"States with low or no income taxes need to generate revenue from somewhere," Hayden says. "They often turn to sales taxes—which might not be as high as an income tax, but it can add up, especially on popular big purchases like boats and cars."
Income, property, and sales taxes across America
No state is entirely tax-free.
No state is entirely tax-free.
|State||Income tax collections per capita*||Effective property tax rate||State and local sales tax?‡||Quality of life ranking|
|LA||$841||0.54%||9.55% (highest)||#50 (lowest)|
|WA||$0 (lowest)||0.88%||9.29%||#1 (highest)|
Estate and/or inheritance tax
Even if your estate falls within the federal estate tax exemption—$12.06 million for individuals and $24.12 million for married couples in 2022—there are 17 states plus the District of Columbia that may tax your estate, your inheritance, or both.8 This is especially pertinent to individuals who wish to pass the maximum amount to their heirs (as opposed to, say, charity). Of those states, 13 have an estate tax:
- Connecticut (11.6% to 12% on estates above $9.1 million)
- D.C. (11.2% to 16% on estates above $4.3 million)
- Hawaii (10% to 20% on estates above $5.5 million)
- Illinois (0.8% to 16% on estates above $4 million)
- Maine (8% to 12% on estates above $6.01 million)
- Maryland (0.8% to 16% on estates above $5 million)
- Massachusetts (0.8% to 16% on estates above $1 million)
- Minnesota (13% to 16% on estates above $3 million)
- New York (3.06% to 16% on estates above $6.1 million)
- Oregon (10% to 16% on estates above $1 million)
- Rhode Island (0.8% to 16% on estates above $1.65 million)
- Vermont (16% on estates above $5 million)
- Washington (10% to 20% on estates above $2.2 million)
And six have an inheritance tax (Maryland has both):
- Iowa (up to 9%)
- Kentucky (up to16%)
- Maryland (up to 10%)
- Nebraska (up to 18%)
- New Jersey (up to 16%)
- Pennsylvania (up to 15%)
What about trusts?
For example, about half of U.S. states and Washington, D.C., allow dynasty trusts of varying lengths. But of the seven states that do not tax any personal income, only four—Alaska, Nevada, South Dakota, and Tennessee—have laws designed to protect such trusts against claims by creditors and former spouses." id="body_disclosure--media_disclosure--82976" >
Trust terms aren't dependent on where you live. In fact, appointing a corporate trustee can allow you to locate your trust in a state significantly more advantageous than your own.
"There are three things to look at when considering in which state to locate your trust," says Austin Jarvis, director of trust, tax, and estate at the Schwab Center for Financial Research. "Does the state tax income, does it have favorable asset protection laws, and what are its statutes around dynasty trusts, which allow wealth to be passed down over several generations without incurring transfer taxes?"
For example, about half of U.S. states and Washington, D.C., allow dynasty trusts of varying lengths. But of the seven states that do not tax any personal income, only four—Alaska, Nevada, South Dakota, and Tennessee—have laws designed to protect such trusts against claims by creditors and former spouses.
Although states vary widely in their approach to taxes, it's hard to rank them from best to worst because it largely depends on your income, whether you own property, the size of your estate, where you want to live, and the benefits a state provides in exchange for its tax revenues.
For example, while retirees may be more concerned with Social Security and estate taxes, a young couple might care more about property taxes and proximity to family. "It comes down to your stage of life and which taxes matter most to you," Hayden says.
Indeed, it can be well worth consulting a certified public accountant or tax advisor specific to any state in which you hope to live or work. "They may know rules you haven't heard of and can potentially save you money in the long run," Hayden says, "which is the very essence of being tax savvy."
What about Social Security?
Twelve states may also fully or partially tax your Social Security benefit, depending on your age, income, and other thresholds: Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, Rhode Island, Utah, Vermont, and West Virginia." id="body_disclosure--media_disclosure--82941" >
Whether your Social Security benefit is federally taxable depends on your combined income—which is the total of your adjusted gross income (AGI), half your Social Security benefit, and any nontaxable interest income (from tax-exempt municipal bonds, for example). You can do your own calculation using the IRS Interactive Tax Assistant.
Twelve states may also fully or partially tax your Social Security benefit, depending on your age, income, and other thresholds: Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, Rhode Island, Utah, Vermont, and West Virginia.
1Tax Foundation, "Facts & Figures 2022: How Does Your State Compare?"
2Tax Policy Center, "State Individual Income Taxes, 2022."
3Tax Foundation, "Taxes in Washington" and "Taxes in New Hampshire."
4Lyle Daly, "2021 Capital Gains Tax Rates: Everything You Need to Know," fool.com, 07/14/2022.
5, 6Ibid, 1.
7Tax Foundation, "State and Local Sales Tax Rates, Midyear 2022."
8John Waggoner, "17 States With Estate or Inheritance Taxes," AARP.org, 06/21/2022.
The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.
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