“Location, location, location” is a goal that applies to more than housing. Where you live can help or hinder you in making ends meet.
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A myriad of taxes — such as property taxes, licensing, state and local sales, estates, estates, and excise duties — can eat away at your income. Often the biggest tax ticket citizens face after paying the Internal Revenue Service is the one their state presents. Therefore, identifying the states with the lowest taxes could be a smart financial decision to make.
Currently, 41 states and the District of Columbia levy a personal income tax. Weighing the tax landscape against your financial situation could help you optimize your budget.
10 States With The Highest Personal Income Tax Rates
A comparison of 2020 tax rates compiled by the Tax Foundation ranks California top in taxes with a rate of 12.3% unless you earn over $1 million. Then you have to pay 13.3% as the maximum rate. The additional tax on income over $1 million is the 1% State Mental Health Services Tax.
The 10 highest income tax states (or legal jurisdictions) for 2021 are:
- California 13.3%
- Hawaii 11%
- New Jersey 10.75%
- Oregon 9.9%
- Minnesota 9.85%
- District of Colombia 8.95%
- New York 8.82%
- Vermont 8.75%
- Iowa 8.53%
- Wisconsin 7.65%
Each of these states has a personal income tax floor, deductions, exemptions, credits, and various definitions of taxable income that determine what a citizen actually pays.
10 States With The Lowest Personal Income Tax Rates
Only seven states have no personal income tax:
- South Dakota
Additionally, Tennessee and New Hampshire limit their taxation to interest and dividend income, not wage income.
Of the states that tax income, Pennsylvania’s 3.07% flat tax ranks the Keystone state as the 10th lowest in the nation for 2021.
Low personal income tax rates can be misleading; a lack of available tax deductions, for example, may increase the effective rate you pay. The Retirement Living Information Center says that calculating your total tax burden, including sales and property taxes, can give you a more accurate reading of affordability, especially if you are on a fixed income. However, those states with the lowest income taxes may be a good place to start looking for a more affordable location.
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States with the highest and lowest property taxes
Property tax is a local jurisdiction, not the state. Median household property tax payments from analysis by the Tax Foundation—as a percentage of median household income from the Census Bureau’s 2018 American Community Survey—cite these as the counties with the most expensive property tax:
- Essex County, New Jersey 16.86%
- Passaic County, New Jersey 14.62%
- Union County, New Jersey 12.70%
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These Louisiana parishes hold the cheapest places for property tax as a percentage of income:
- Assumption Parish 0%
- Vernon Parish 0.45%
- Grant Parish 0.68%
Louisiana has some of the lowest property tax rates as a percentage of earned income because it offers a homestead exemption. This law allows the first $7,500 of assessed property values to waive the imposition of property taxes.
For reference, estimated home values are 1/10 of the actual home value. For example, a $100,000 house would have a taxable value of $10,000. Therefore, the Louisiana Homestead Exemption allows the first $75,000 of the home’s value to be excluded from the calculation of your property tax bill, which goes a long way in reducing the percentage of income assigned to these taxes.
Sales tax takers and leavers
If you’re a consumer, you’ll want to consider that all but four states — Oregon, New Hampshire, Montana, and Delaware — rely on sales tax for their income. Alaska only levies a paltry sales tax rate of 1.76%.
Of these, Alaska also has no income tax, thanks to the severance tax it levies on oil and natural gas production. 37 states, including Alaska and Montana without sales tax, allow local municipalities to impose sales tax, which can add up. Lake Providence, Louisiana has the dubious distinction of the nation’s most expensive sales tax city in 2021, with a combined state and city rate of 11.45%.
Taking into account the combination of state and average local sales tax, the five highest total sales tax states, ranked by the Tax Foundation for 2021, are:
- Tennessee 9.55%
- Louisiana 9.52%
- Arkansas 9.51%
- Washington 9.23%
- Alabama 9.22%
Residents of these states pay the least amount of sales tax overall:
- Alaskan 1.76%
- Oregon 0%
- Montana 0%
- New Hampshire 0%
Combined sales and income tax leaders
The Tax Foundation interprets the individual tax burden based on what taxpayers actually spend on local and state taxes, rather than reporting those expenses from the perspective of state revenue used by the Census Bureau. Its 2019 State and Local Tax Burden Rankings study reported that Americans paid an average rate of 9.9% in state and local taxes.
According to the foundation, the top five states with the highest state and local tax combinations are:
- New York 12.7%
- Connecticut 12.6%
- New Jersey 12.2%
- Illinois 11.0%
- California and Wisconsin 11.0%
The same states have ranked in the top three consistently since 2005, according to the foundation.
Although taxes are not the first thing you consider when deciding where to live, knowing the tax situations of the places you are considering moving to could help you save money in the long run. especially in retirement.
Remember, with TurboTax, we’ll ask you simple questions about your life and help you fill out all the right tax forms. With TurboTax, you can be sure your taxes are done right, from simple to complex tax returns, whatever your situation.