The Federal Government taxes everyone’s income according to the same scale, but each state has the ability to set different types of taxes on its citizens, including property tax, sales tax, and income tax. This means the amount of tax you’d pay if you live in Florida may be vastly different than the amount you’d pay if you live in California.
For some states, property and sales taxes are the main sources of revenue. In fact, several states don’t collect income tax at all. Depending on your long-term financial goals, you might want to consider living in such a state – or, at the very least, do your Christmas shopping in a state with no sales tax.
Rates and Types of Various State Taxes
Sales Tax Rates
The only states that don’t collect sales tax are Alaska, Delaware, Montana, Oregon, and New Hampshire. Colorado has the lowest rate among states that have a sales tax at 2.9% – though, depending on local municipalities, the total sales tax rate can be as high as 10.9%. In fact, as of 2015, the combined state and average local sales tax rate in Colorado is a relatively high 7.44%, which ranks as 15th-highest in the United States.
While most states permit local governments to add their own taxes, some do not, and thus have the same sales tax rate throughout the state. As of March 2016, these states are Indiana, Kentucky, Maine, Maryland, Massachusetts, Michigan, New Jersey, and Rhode Island, plus Washington, D.C.
The states with the highest minimum state sales tax rates are:
- California (7.5%)
- Indiana, Mississippi, New Jersey, Rhode Island, and Tennessee (7%)
- Minnesota (6.875%)
- Nevada (6.85%)
- Arkansas and Washington (6.5%)
- Connecticut (6.35%)
- Texas, Massachusetts, and Illinois (6.25%)
- Kansas (6.15%)
If you’re planning a big shopping spree, you might want to avoid these states. In some of the no-sales-tax states, you could save a bundle on a big purchase.
Personal Income Tax Rates
Most states collect income taxes, but one reason that Florida and Nevada are such big retiree hot spots (other than the warm weather) is that they don’t collect income taxes at all. In addition, Alaska, South Dakota, Texas, Washington, and Wyoming do not collect income tax, and New Hampshire and Tennessee only collect income taxes on passive income from interest and dividends.
Of the states that do collect income tax, most base the amount off your federal income tax return and allow you to apply any relevant tax deductions and credits. Several states also allow you to deduct the federal income tax you pay: Alabama, Iowa, Louisiana, Missouri, Montana, North Dakota, Oklahoma, Oregon, and Utah.
Taxes on Social Security
Another way that retirees can manage their tax burden is to relocate to a state that doesn’t tax Social Security benefits. In addition to the states that don’t collect personal income tax, a majority of the states, plus Washington, D.C., don’t tax Social Security benefits at all. These states are Alabama, Arizona, Arkansas, California, Delaware, Florida, Georgia, Hawaii, Idaho, Illinois, Indiana, Iowa, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Mississippi, Missouri, Nevada, New Hampshire, New Jersey, New York, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, South Carolina, South Dakota, Tennessee, Texas, Virginia, Washington, Wisconsin, and Wyoming. While the Federal Government may tax your Social Security benefits, if you have other income aside from Social Security, these states do not.
States that tax Social Security use one of three methods:
- Minnesota, Nebraska, North Dakota, Rhode Island, Vermont, and West Virginia only tax Social Security in the amount that the Federal Government taxes it.
- You’ll only be taxed on your Social Security benefits in Connecticut, Kansas, Missouri, and Montana if you have other income above a certain, relatively high amount. And Kansas residents don’t pay taxes on Social Security income if their adjusted gross income is less than $75,000, which is one of the higher state allowances.
- Colorado, New Mexico and Utah require that federally untaxed Social Security benefits be added back to your federal adjusted gross income to determine the amount that your state taxes will be based on, but then allow you to exclude certain amounts from your income depending on your age.
Retired military personnel also get tax breaks in these states, which allow some or all military pension benefits to go untaxed: Alabama, Alaska, Florida, Hawaii, Illinois, Kansas, Kentucky, Louisiana, Massachusetts, Michigan, Mississippi, Missouri, Nevada, New Hampshire, New Jersey, New York, North Carolina, Ohio, Oregon, Pennsylvania, South Dakota, Tennessee, Texas, Washington, Wisconsin, and Wyoming.
Comparative Tax Burden
So with all these differences between states, do the citizens of any state come out significantly ahead or behind of the pack? It depends on your financial situation, whether you own a home, the source of your income, and how much income you have.
A 2009 survey done by Washington, D.C.’s finance office attempted to calculate the tax burden for a family of three making $25,000, $50,000, $75,000, $100,000, or $150,000 per year in the largest city in each state. In this survey, the family was assumed to own a home, except at the $25,000 income level, where they were assumed to rent.
The numbers below show the percent of total income that the family paid towards taxes, including income, property, auto, and sales taxes for the top and bottom five cities in each category.
Highest State Taxes
|Traditional IRA||Roth IRA|
|Availability||- Cannot contribute more than annual income|
- Must be under 70½ years old
- Restrictions in place if participating in 401k plan
|- Cannot contribute more than annual income|
- No age restriction
- If income is over $169,000 (joint filing) or $107,000 (single filing), restrictions apply
|Contribution Limits||$5,000 annual limit ($6,000 if 50 years of age and above)||$5,000 annual limit ($6,000 if 50 years of age and above)|
|Deadline||April 15 (tax return cutoff date) of the next year||April 15 (tax return cutoff date) of the next year|
|Contributions||Made with pre-tax dollars - taxes paid on withdrawal||Made with after tax dollars – no taxes assessed upon withdrawal|
Lowest State Taxes
|Traditional 401k||Roth 401k|
|Contribution Limits||$16,500/year (does not include employer match)||$16,500/year (does not include employer match)|
|Contributions||Pre-tax dollars – taxes are paid upon withdrawal||After-tax dollars – withdrawals are non-taxable|
If you’re planning a move to a new state, it may be worth studying the tax burden of your top three choices and see which is optimal for your family – likewise, if you’re planning a big purchase. It’s better to buy a $2,000 computer in a state with no sales tax than in a place like California, where you’d pay 7.5% for the privilege.
How much state taxes do you pay in your area, and how does it compare to other locations in the U.S.?