If you have the ability and the will to relocate, you may reasonably seek out states with no income tax. There are seven of those – Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. (Tennessee and New Hampshire tax dividends and interest income.) That's probably not the best way to find a perfect new home for yourself, though. It's better to consider a state's big picture -- and the overall quality of life that it can offer you.
Money isn't everything
Remember, for starters, that there's more to a good life than money. Along with a state's tax rates, you might consider the cost of living, incorporating the cost of housing, food, gas, recreation, and so on. That's still too broad, though, since costs can vary widely between a state's cities and rural areas, and even between cities. Upstate New York, for instance, offers a much different setting than New York City.
Still, the folks at top50states.com have taken a stab at determining an overall ranking of states. The states with the lowest cost of living are Oklahoma, Tennessee, Arkansas, Kentucky, South Dakota, Kansas, and Nebraska. Note that most of those are not among the states with no income tax. The highest cost of living can be found in California, Hawaii, New Jersey, Alaska, Maryland, and Connecticut. The states with no income tax do include Alaska, but that's it.
When it comes to overall quality of life, there are plenty of rankings to be found. The folks at CNBC.com offered a list last year, taking into account factors such as crime, environmental health, health-care facilities, recreation access, and more. Their top-ranked states were New Hampshire, Hawaii, Vermont, Maine, Minnesota, and North and South Dakota. Among those, only New Hampshire is among the states with no (earned) income tax.
Of course, do your own calculations, appropriately weighting the factors that mean most to you, which might be clean air, warm weather, affordable housing, and perhaps the overall happiness found in the region. Per the annual Gallup-Healthways Well-Being Index survey, the states with the greatest well-being are Hawaii, Colorado, Minnesota, Utah, and Vermont, with the least happy states including West Virginia, Kentucky, Mississippi, Tennessee, and Arkansas.
Even with money ...
Along with social factors, financial considerations have their place, too, when you're evaluating possible new locations. (After all, a retirement with too few dollars can be an ugly thing.) For starters, those not yet in retirement might want to consider the unemployment rate of any potential new home, too. Nevada is one of the states with no income tax, but it also recently sported the highest unemployment level, offsetting attractiveness with some unattractiveness.
A state's tax rate is worth considering, too, as long as you put it in context. For example, one of the states with no income tax is Wyoming, but as most states do, it taxes other things and can thus make up the difference in funds lost from not taxing income. Figures from the Tax Foundation show that Wyoming levies a 4% sales tax and a substantial residential property tax. Nevada had a 6.85% sales tax, while Florida charged 6% and also socked businesses with a 5.5% corporate income tax. Look closely at how a state's various taxes, including ones on income, would affect you. Some states are particularly retiree-friendly -- my colleague Dan Caplinger has noted that Pennsylvania and Mississippi exempt Social Security and pension benefits from income taxes, as well as distributions from IRAs and 401(k) plans.
So don't give too much importance to lists of states with no income tax. Always evaluate the big picture, and determine which possible new locations offer the best combination of benefits for your needs.
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