These 7 U.S. States Have No Income Tax

There are seven U.S. states with no income tax. Another two states have no tax on earned income but do tax interest and dividend income. But keeping more of your income is not as simple as moving to a state with no income taxes. As the saying goes, if something looks too good to be true, it probably is.

These states still need money for government services. While they don't have an income tax, they raise revenue through other means, such as sales taxes, property taxes, corporate taxes, and other fees. Depending on your situation and your willingness to move, with some planning, you could save some money if the combined taxes and cost of living in a different state are lower. Read on to find out more.

States with no income tax:

1. Alaska
2. Florida
3. Nevada
4. South Dakota
5. Texas
6. Washington
7. Wyoming

States with almost no income tax:

1. Tennessee
2. New Hampshire

Compare your state's top income tax rate with the rest of the country. The states with no income tax are in dark green, those with nearly no income tax are in light green, and the rest go from yellow to red.

Let's examine the states with no income tax using each state's data on tax revenue; the Tax Foundation's most recent data, which is for 2011; and the Council for Community and Economic Research's Cost of Living Index which is up to date through the second quarter of 2014.

1. Alaska
Alaska is the only state in the U.S. with both no income tax and no state sales tax, though it does allow local sales taxes. The state allows property taxes that add up. According to the Tax Foundation, the average state and local property tax paid per capita in 2011 was $2,076. Other taxes added $1,243 to the average per-capita state and local tax paid, for a grand total of $3,319 -- the 18th-lowest amount of all 50 states.

Alaska funds its operations through royalties on oil and gas production. Besides low taxes, residents get a direct benefit from these royalties through the state's Permanent Fund, which pays full-year residents of Alaska a yearly dividend based on the earnings of the royalties over the past five years.

As the fund's earnings have been high and growing the past five years, this year the fund is paying out a whopping $1,884 to each eligible resident on Nov. 20 -- more than double last year's dividend of $900. The fund has paid an average of $1,223 annually over the past five years. Subtracting the dividend from the average per-capita state and local tax paid would make Alaska the lowest state in terms of per-capita taxes paid by $1,100 a year.

The financial benefits of living in Alaska are tempered by the harsh winters and the relatively high cost of living. Compared to a national average, $100 in Alaska buys you far less than it does across the rest of the country. The table below shows the relative value of $100 in Alaska compared to the rest of the U.S.:

Source: Council for Community and Economic Research's Cost of Living Index.

2. Florida
Florida has long been a draw for retirees sick of the North's cold winters and high income taxes, along with tourists from around the world. The state government funds itself with a 6% sales tax and a 5.5% corporate income tax. According to the Tax Foundation, the average state and local property tax paid per capita was $1,368 in 2011. Other taxes added $2,331 to the average per-capita state and local tax paid, for a grand total of $3,699 -- the 24th-highest amount of all 50 states.

Florida comes close to the national average in the value of $100, with housing dollars going farther than the national average.

Source: Council for Community and Economic Research's Cost of Living Index.

Given the reasonable cost of living compared to the national average, no income taxes, and great weather, you can see why over 500,000 people moved to the state last year. .

3. Nevada
While Nevada is best known for its gambling and convention industries, the weather and lack of an income tax are big for residents. Like other tourism-focused states, Nevada funds itself through sales and use taxes that start at 6.85%. According to the Tax Foundation, the average state and local property tax paid per capita was $1,110 in 2011. Other taxes added $2,111 to the average per-capita state and local tax paid, for a grand total of $3,221 -- the 15th-lowest amount of all 50 states.

Nevada is also close to the national average when it comes to the value of $100, with utilities dollars going farther than the national average. The state gets relatively cheap power from Hoover Dam, the sixth-largest hydroelectric dam in the U.S.

Source: Council for Community and Economic Research's Cost of Living Index.

4. South Dakota
South Dakota has no income tax on individuals or corporations. Instead, the state funds its operations through a 4% sales tax and various use taxes. According to the Tax Foundation, the average state and local property tax paid per capita in 2011 was $1,196. Other taxes added $1,856 to the average per-capita state and local tax paid, for a grand total of $3,052 -- the seventh-lowest amount of all 50 states.

The relative value of $100 in South Dakota comes close to the national average, with transportation dollars going farther than the national average.

Source: Council for Community and Economic Research's Cost of Living Index.

5. Texas
Texas funds itself through a 6.25% sales tax, taxes on motor vehicle sales and fuel, and taxes and royalties on oil and natural-gas production. According to the Tax Foundation, the average state and local property tax paid per capita in 2011 was $1,557. Other taxes added $1,531 to the average per-capita state and local tax paid, for a grand total of $3,088 -- the eighth-lowest amount of all 50 states.

Texas is overall less expensive than the national average, with housing dollars going furthest compared to the national average.

Source: Council for Community and Economic Research's Cost of Living Index

 6. Washington
Washington funds itself through a 6.5% sales tax and also allows local sales taxes. The state's high sales taxes and property taxes add up. According to the Tax Foundation, the average state and local property tax paid per capita in 2011 was $1,279. Other taxes added $3,087 to the average per-capita state and local tax paid, for a grand total of $4,366 -- the 12th-highest amount of all 50 states.

Washington is more overall expensive than the national average, with utilities dollars going furthest compared to the national average.

Source: Council for Community and Economic Research's Cost of Living Index.

7. Wyoming
Wyoming funds its operations mainly through its natural-resources taxes, as well as property taxes. The state has a property tax rate of 9.5%, though its sales tax is only 4%. According to the Tax Foundation, the average state and local property tax paid per capita in 2011 was $2,175. Other taxes added $1,325 to the average per-capita state and local tax paid, for a grand total of $3,500 -- the 22nd-lowest amount of all 50 states.

Wyoming is a relatively inexpensive state, with transportation dollars going furthest compared to the national average.

Source: Council for Community and Economic Research's Cost of Living Index.

States with nearly no income tax:

1. Tennessee
Tennessee has no income tax on wages, but it does tax interest and dividend income at 6% in what it calls a "hall tax." Tennessee also has a 7% sales tax. This November, Tennesseans passed an amendment to the state Constitution that specifically bans any future state or local taxes on payroll or earned personal income. Nonetheless, if you are a retiree living off dividends and interest income, you should think twice before moving to Tennessee for the tax benefits.

According to the Tax Foundation, the average state and local property tax paid per capita in 2011 was $800. Other taxes added $1,978 to the average per-capita state and local tax paid, for a grand total of $2,778 -- the second-lowest amount of all 50 states.

Tennessee is less expensive than the national average, with transportation dollars going the furthest.

Source: Council for Community and Economic Research's Cost of Living Index.

2. New Hampshire
New Hampshire also has no income tax on earned income, but it has a 5% tax on interest and dividend income. While there is no sales tax, the state has high property taxes and an 8.5% corporate tax rate. According to the Tax Foundation, the average state and local property tax paid per capita in 2011 was $2,518. Other taxes added $1,251 to the average per-capita state and local tax paid, for a grand total of $3,769 -- the 22nd-highest amount of all 50 states.

New Hampshire is overall more expensive than the national average, with housing in particular costing residents a pretty penny.

Source: Council for Community and Economic Research's Cost of Living Index.

Learn the whole story
If you want less of your income and savings devoured by taxes, there's more to consider than just the income tax. Property taxes, sales taxes, and the overall cost of living all add up, and the total can make your income-tax savings look negligible.