No-Income-Tax States Explained: What They Are, Who Benefits, and the Tradeoffs of Moving

Thinking about moving to a state with no personal income tax? The promise of “no state income tax” is tempting — more take-home pay, simpler filings, and a clear headline benefit — but the reality involves tradeoffs, eligibility rules, and a range of factors beyond the headline. This article walks through which states have no broad-based income tax, how those states raise revenue instead, who actually benefits, how residency is determined for tax purposes, and practical steps to consider before you relocate.

What does “no income tax” really mean?

When a state advertises “no personal income tax,” it generally means there is no broad-based tax on wages, salaries, and typically most forms of ordinary income for residents. That wording hides nuance: some states with no wage tax still tax investment income (interest and dividends) or corporate income, and many make up revenue with other sources such as sales, property, and excise taxes. Understanding the precise scope matters if you expect to receive significant investment or retirement income.

States that have no broad-based personal income tax

As of the latest commonly available data, seven states impose no general personal income tax on wages and salaries: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. Two additional states — New Hampshire and Tennessee — historically taxed only interest and dividend income; Tennessee phased out its Hall Tax entirely by 2021, and New Hampshire still taxes certain investment income but not earned wages. Always check current state law: tax statutes and rules can change.

How do no-income-tax states raise revenue?

States still need to fund roads, schools, courts, police, and other public services. Without a payroll-style income tax, they rely on a mix of other revenue sources:

• Sales taxes: Often higher statewide sales tax rates and broader local sales taxes. Tourism-heavy states may raise much revenue from visitors.
• Property taxes: Local property taxes can be higher, shifting burdens to homeowners and commercial property owners.
• Business taxes and fees: Corporate taxes, franchise taxes, licenses, and regulatory fees help fill the gap.
• Severance or resource taxes: Energy-producing states (e.g., Alaska, Wyoming) levy taxes on extracted natural resources.
• Federal transfers and unique revenue models: Some states depend more on federal funds, investment earnings from state trusts, or sovereign wealth funds.

Revenue volatility and budget tradeoffs

Relying heavily on sales taxes or resource extraction can make state revenues more volatile than income tax-based systems. That volatility can show up as higher emergency reserves, greater use of temporary taxes, or tighter spending during downturns — potentially affecting education funding, infrastructure investment, and social programs.

Who benefits from living in a no-income-tax state?

Which taxpayers gain the most depends on income composition and lifestyle:

• High earners whose income is primarily wages or business income often see the clearest benefit in take-home pay.
• Retirees with income mainly from Social Security (which is federally taxed but not state-taxed in most no-tax states) and pensions can benefit, though retirees with large investment portfolios may face taxes in states that still tax dividends or interest.
• People who spend a lot locally may face higher sales taxes, offsetting some gains; homeowners in states with high property taxes might not see as much net benefit.

The regressivity question

Sales and consumption taxes are generally considered regressive: lower-income households spend a larger share of their income on taxable goods. In no-income-tax states that rely heavily on sales taxes, low- and middle-income residents sometimes carry a disproportionate share of the state tax burden compared to wealthy residents.

How residency for state taxes is determined

Moving to avoid state income tax is common, but states scrutinize residency carefully. Two legal concepts are important:

• Domicile: Your permanent legal home — the place you intend to return to and remain. Domicile is subjective and determined by facts and intent.
• Statutory residency: Some states have objective day-count rules (for example, 183 days) that make you a resident for tax purposes even if you claim domicile elsewhere.

Common residency factors and documentation

States look at numerous connections to decide residency: where you register to vote, the address on your driver’s license, where your car is registered, the location of your primary bank accounts, your mailing address, where you spend the majority of your time, and family ties. To establish residency in a no-income-tax state, practical steps include obtaining a local driver’s license, registering to vote, documenting a physical move (lease or deed), updating billing addresses, and spending significant time in the new state.

Beware of dual-residency audits and domicile disputes

If you have significant ties to a high-tax state (a home, spouse, business, or extended stays), that state may argue you remain a resident and are still subject to its income tax. Keep careful records: travel logs, calendars, work locations, and clear evidence of severed ties to the former state help defend residency claims if challenged.

Practical tax and financial consequences of moving

Before relocating, run the numbers. Consider:

• Take-home pay improvements vs higher sales or property taxes.
• State-level exemptions, credits, and tax treatment of retirement income or investments.
• Impact on employer withholding: employers typically withhold state taxes based on the state listed on your payroll forms, so updating your address and withholding forms is necessary.
• Business considerations: if you run a business or work remotely for a company in another state, you might create nexus, payroll withholding obligations, or business tax registrations in multiple states.

Retirement, investments, and estate planning

Some no-income-tax states still tax interest and dividends or have different treatment of retirement plan distributions. Evaluate pension and IRA tax rules, as well as estate and inheritance taxes — a state with no income tax could still impose estate taxes. Consult a tax professional to map how moving affects taxable income, required minimum distributions, and potential state-level taxes on investment income.

Checklist before you move to a no-income-tax state

To minimize surprises and reduce audit risk, follow this practical checklist:

• Compare overall tax burdens (income, sales, property, and special taxes) under current and proposed states.
• Document the move thoroughly: closing escrow, lease agreements, utility registrations, and final bills in previous state.
• Update legal documents and registrations: driver’s license, voter registration, vehicle registration, and professional licenses.
• Adjust employer payroll information and state withholding; if freelancing, review nexus and state business registration rules.
• Keep travel logs, calendars, and proof of days spent in each state for at least three years in case of residency challenges.
• Consult a CPA or tax attorney if you have complex income (businesses, rental properties, significant investments, or multiple residences).

Choosing a no-income-tax state can yield real benefits, but the decision should be rooted in a careful comparison of total tax burden, public services, housing costs, and long-term financial goals. Taxes are just one factor in quality-of-life decisions, and the best move balances short-term take-home pay against property costs, local services, and the administrative work required to prove residency. Thoughtful planning, clear documentation, and professional advice will help you turn the promise of tax savings into actual, defensible results without unintended consequences.