Are you trying to decide between job offers in two different states? Wondering whether you and your long-distance love interest should take the next step in your relationship by moving to her state or yours? Evaluating where to retire? If you have some flexibility in where you live, one factor you might consider is the difference in tax burdens among states.
Levels of state income tax, sales tax and property tax can significantly affect your finances, your lifestyle and how many options you have when making major life decisions. For example, if you live in a state where taxes are lower and you have more money left at the end of the month, you might be able to retire earlier or choose the career you're most passionate about instead of working into your 70s or choosing the career that pays the most.
Choosing the Right State Isn't Easy
Choosing a state to live in based on its apparent tax burden isn't as straightforward as it might seem, however. You can't just add up a state's various tax rates and get the state with the highest tax burden. Sales taxes are a based on a percentage of certain types of purchases. Income taxes are based on a percentage of how much you earn. Real estate property taxes are based on a percentage of homes' and land's assessed value. So how you experience a state's tax burden depends on how much you spend on taxable goods and services, how much you earn, whether you're married or single, whether and what type of real estate you own, and which tax deductions, exemptions and credits you qualify for.
With these caveats in mind, here are some of the best and worst states to live in for various situations.
High-Income Earners
Best states. If you earn a lot of money, especially if you work remotely and that income isn't tied to being in a particular location, you'll have the lowest income-tax burden if you live in one of the states that doesn't tax income: Alaska, Florida, Nevada, New Hampshire, South Dakota, Texas, Washington or Wyoming.
Still very good. Eight other states have relatively low income-tax burdens for singles: North Dakota, New Jersey, Pennsylvania, Arizona, Indiana, Ohio, Vermont and Rhode Island. Here's what they charge:
State
Income Tax Rate – Singles ($26,989 median income)
North Dakota
1.51%
New Jersey
1.75%
Pennsylvania
3.07%
Arizona
3.36%
Indiana
3.40%
Ohio
3.52%
Vermont
3.55%
Rhode Island
3.75%
Data : Tax-Rates.org, Income Tax Rates by State, individual pages showing tax brackets for each state linked from http://www.tax-rates.org/taxtables/income-tax-by-state.
If you're married, the math changes slightly because different states give different tax advantages to married taxpayers who file jointly. New Jersey, North Dakota, Pennsylvania, Indiana, Ohio and Arizona still make the list, but Louisiana and Michigan replace Vermont and Rhode Island.
State
Income Tax Rate – Families ($62,241 median income)
New Jersey
1.75%
North Dakota
2.82%
Pennsylvania
3.07%
Indiana
3.40%
Ohio3.76 %
Louisiana
4.00%
Arizona
4.24%
Michigan
4.25%
Data : Tax-Rates.org, Income Tax Rates by State, individual pages showing tax brackets for each state linked from http://www.tax-rates.org/taxtables/income-tax-by-state.
Worst states. High-income earners might want to think carefully about the cost of working in California, Oregon, Maine, Iowa, Hawaii, Idaho, Arkansas, South Carolina, Minnesota and North Carolina. These states tax married couples earning the median income at a rate of 5.8% or more.
State
Income Tax Rate – Families ($62,241 median income)
California
9.30%
Oregon
9.00%
Maine
7.95%
Iowa
7.92%
Hawaii
7.60%
Idaho
7.40%
Minnesota
7.05%Arkansas
7.00%
South Carolina
7.00%North Carolina
5.8%
Data : Tax-Rates.org, Income Tax Rates by State, individual pages showing tax brackets for each state linked from http://www.tax-rates.org/taxtables/income-tax-by-state.
Single taxpayers earning the median income or higher fare the worst in Oregon, Maine, Hawaii, Idaho, Minnesota, South Carolina and North Caolina.
State
Income Tax Rate – Singles ($26,989 median income)
Oregon
9.00%Maine
7.95%
Hawaii
7.60%
Idaho
7.40%
Minnesota
7.05%
South Carolina
7.00%
North Carolina
5.8%
Data : Tax-Rates.org, Income Tax Rates by State, individual pages showing tax brackets for each state linked from http://www.tax-rates.org/taxtables/income-tax-by-state.
Keep in mind that states individually establish tax brackets, so an income that puts you in one state's top bracket might put you in another state's middle bracket. In some states, even low-income earners pay the top rate because the bar is so low. Your state income tax bill will also depend on which exemptions, deductions and credits you are able to take. (See our video Tax Deductions Vs.Tax Credits.) What's available and who qualifies again vary by state.
Owners of Land and Homes
Property tax rates aren't determined by the states; they're established at the local level. To understand what property tax rate you'll pay, you need to know exactly where the home or land you want to own is located. To get a broad idea, however, you can consider the average property tax rate in each state for the median home price in that state.
Best states. Five states come in with rates under half a percent:
State
Average Property Tax Rate on State Median Home Price
Louisiana
0.18%
Hawaii
0.26%
Alabama
0.33%
Delaware
0.43%
West Virginia
0.49%
Data : Tax-Rates.org, Property Taxes by State, individual pages showing average percentage of home value for each state linked from http://www.tax-rates.org/taxtables/property-tax-by-state.
Worst states. Another five states come in with rates above 1.75%:
State
Average Property Tax Rate on State Median Home Price
New Jersey
1.89%
New Hampshire
1.86%
Texas
1.81%
Wisconsin
1.76%
Nebraska
1.76%
Data : Tax-Rates.org, Property Taxes by State, individual pages showing average percentage of home value for each state linked from http://www.tax-rates.org/taxtables/property-tax-by-state.
You won't pay property taxes directly if you rent, but your rent may be higher since your landlord has to factor property taxes into his or her operating costs.
Big Spenders
States establish a basic sales tax rate, but each locality can add on to that rate if it chooses. For example, Georgia's state sales tax rate is just 4%, but Fulton County adds 3% and Atlanta adds another 1%, so anyone who buys a taxable good or service in Atlanta pays an 8% sales tax.
To further complicate matters, many states that generally charge sales tax exempt certain items, such as groceries and prescription drugs, while some states that generally don't charge sales tax do levy this tax on certain items. For example, New Hampshire has no state sales tax, but it charges a 9% tax on restaurant meals, hotel rooms and car rentals, and a 7% tax on telecommunications services. In addition, states typically tax some services, but not others. Arizona, Connecticut and Hawaii, for example, are among the states that tax construction services, while California, Illinois and Kentucky are among the states that don't.
No sales tax. That being said, five states have no state sales tax, and their biggest cities don't pile on to the sales tax burden, either. These states are Alaska, Delaware, Montana, New Hampshire and Oregon.
State
State Sales Tax
Alaska
0.00%
Delaware
0.00%
Montana
0.00%
New Hampshire
0.00%
Oregon
0.00%
Data s: Retirement Living Information Center, Taxes by State, http://www.retirementliving.com/taxes-by-state; Sale-Tax.com, State Sales Tax Rates, http://www.sale-tax.com/.
Highest sales-tax states. Of the five states with the worst sales tax burdens, two of those states' biggest cities make sales taxes even higher.
State
State Sales Tax
Most Populous City
State + Local Sales Tax in Most Populous City
Difference
Indiana
7.00%
Indianapolis
7.00%
0.00%
Mississippi
7.00%
Jackson
8.00%
1.00%
New Jersey
7.00%
Newark
7.00%
0.00%
Rhode Island
7.00%
Providence
7.00%
0.00%
Tennessee
7.00%
Memphis
9.25%
2.25%
Data s: Retirement Living Information Center, Taxes by State, http://www.retirementliving.com/taxes-by-state; US Census Bureau, United States Census 2010 Population Totals, press releases for each state, various months, 2011, https://www.census.gov/newsroom/releases/archives/2010_census/; Sale-Tax.com, State Sales Tax Rates, http://www.sale-tax.com/.
Highest sales-tax cities. While no state has a sales tax rate higher than 7.0%, quite a few major cities do. Here are the 10 worst:
State
Most Populous City
State + Local Sales Tax in Most Populous City
California
Los Angeles9.75%Washington
Seattle9.50%Tennessee
Memphis
9.25%
Illinois
Chicago
9.25%
Arkansas
Little Rock
9.00%
Alabama
Birmingham
9.00%
Louisiana
New Orleans
9.00%
New York
New York City
8.878%
Oklahoma
Oklahoma City8.375%MissouriKansas City
8.350 %
Data s: Retirement Living Information Center, Taxes by State, http://www.retirementliving.com/taxes-by-state; US Census Bureau, United States Census 2010 Population Totals, press releases for each state, various months, 2011, https://www.census.gov/newsroom/releases/archives/2010_census/; Sale-Tax.com, State Sales Tax Rates, http://www.sale-tax.com/.
The Bottom Line
Despite the significant impact they can have on your finances, tax rates are often a minor factor in deciding which state to live in. Most people care more about living near family, living in a pleasant climate, living where they have the best job opportunities and other factors that aren't always financial. But when more than one state offers you a compelling reason to live there, its tax burden might be the deciding factor.