State Income Tax vs. No‑Income‑Tax States: What Residents Need to Consider

Quick overview

Living in a state that charges personal income tax versus a state that does not is not just about one line on your paystub. A complete comparison must include income tax, sales tax, property tax, local levies, cost of living, and the public services those taxes support. That combination determines whether you actually save money by moving to a no‑income‑tax state.

In my practice advising clients on state moves and tax planning, I’ve seen people assume they’ll always come out ahead by moving to a no‑income‑tax state — but the net effect depends on household income, home value, spending patterns, and how long they plan to live there.

Sources and facts cited in this article are current as of 2025; for federal guidance see the IRS (https://www.irs.gov/) and for comparative state tax data see the Tax Foundation (https://taxfoundation.org/).

How do state income taxes and no-income-tax policies actually differ?

• State income tax: A percentage of taxable income that states collect from residents (and often from nonresidents earning in the state). Rates may be flat or graduated by bracket. State rules also vary widely on what counts as taxable income and whether they tax retirement income or capital gains.
• No‑income‑tax states: These states do not levy a broad personal income tax on wages and many types of income. They typically make up the revenue gap with higher sales taxes, higher property taxes, business taxes, or fees.

Tax Foundation data and state tax codes show this tradeoff clearly — no single tax type tells the whole story (Tax Foundation — https://taxfoundation.org/).

Key considerations residents should evaluate

1. Total tax burden, not just income tax

• Add up likely state income taxes you’d pay now vs. additional sales and property taxes you may face in a no‑income‑tax state. Use your household’s real numbers (wages, mortgage, car use, spending patterns) to run a side‑by‑side comparison.

1. Residency, domicile, and time tests

• Simply buying a home in a no‑income‑tax state doesn’t automatically stop your old state from taxing you. States use domicile rules, statutory residency tests, and other factors to determine where you owe tax. See guidance on establishing tax residency and determining where you owe income tax: Establishing State Income Tax Residency: Key Factors and Risks and State Residency Rules: Determining Where You Owe Income Tax.

1. Who benefits most from no‑income‑tax states

• High earners: May see the biggest dollar savings on wages and investment income.
• Retirees: States that don’t tax retirement income (or have no income tax at all) can reduce tax on pensions and withdrawals, but check how sales/property taxes and healthcare costs compare.
• Small-business owners: Income taxation at the individual level can affect pass-through entities; a move can change your business tax picture—see State Income Tax Planning for Multistate Residents for planning nuances.

1. Public services and quality of life

• Higher state income taxes often fund schools, transportation, and safety nets. A lower‑tax state might provide fewer services or rely on different funding models. Match your priorities—schools, healthcare access, and infrastructure matter.

1. Timing and one-time costs

• Consider moving costs, closing costs, vehicle registration, and potential tax on pension rollovers or real estate sales. For some movers, the first 1–3 years show different net effects compared with long‑term residency.

A simple example (illustrative)

Two households each earn $200,000. State A taxes income at 6% and has moderate property tax; State B has no income tax but higher property tax and sales tax. If the State A household pays $12,000 in income tax but $6,000 less in property + sales tax than State B, the net difference depends on the exact property tax base and spending. This illustrates why estimates built from personal numbers matter more than headline rates.

Common misconceptions

• “No income tax means lowest taxes overall.” Not always. Some no‑income‑tax states offset revenue with higher property or sales taxes or business taxes that hit residents indirectly.
• “You can avoid tax simply by owning property in a no‑income‑tax state.” Changing domicile is a facts-and-circumstances test. Courts and revenue departments look at where you spend your time, your driver’s license, voter registration, and where your family lives.
• “All income is treated the same across states.” States vary on taxing retirement pay, Social Security, capital gains, and qualified dividends.

Practical checklist before you move

• Run a personalized tax projection for your household for the current year and two years after moving.
• Compare property taxes based on the likely home value you’d buy; some states tax assessed value differently than market value.
• Estimate sales taxes using your spending mix (e.g., how much you spend on services vs. taxable goods). Some states exempt groceries or have local surtaxes.
• Review how retirement income is taxed in the destination state.
• Change or keep documentation to show intent to change domicile: voter registration, DMV records, updated estate planning documents, and reduced ties to the old state.

Tools and resources

• Tax Foundation state tax maps and tables: https://taxfoundation.org/ (good for comparing rates and revenue sources)
• U.S. Census Bureau state and local government finance data: https://www.census.gov/ (shows how states raise and use revenue)
• IRS for federal tax treatment and retirement account rules: https://www.irs.gov/
• Consumer Financial Protection Bureau for moving and consumer cost considerations: https://www.consumerfinance.gov/

When to consult a professional

If you have high income, complex investment or retirement accounts, a closely held business, or split-year/multi‑state income, get personalized advice from a CPA or tax attorney. In my experience, a brief consultation that models multi‑year tax outcomes and residency facts often uncovers tradeoffs clients hadn’t anticipated.

FAQs

Q: Are property and sales taxes always higher in no‑income‑tax states?
A: No — there’s variation. Some no‑income‑tax states keep property taxes low and rely on resource or business taxes. Use real data for the specific counties you’re considering.

Q: Can I keep retirement accounts in my old state and avoid taxes?
A: Retirement accounts are generally taxed where you are domiciled when you take distributions. Check state rules for taxation of pensions, IRA/401(k) withdrawals, and Social Security.

Bottom line

A move to a no‑income‑tax state can yield meaningful savings for many people, especially high earners and some retirees. But savings are not automatic — you must measure the full mix of taxes, services, costs, and residency risks. Use a numbers‑driven comparison, document a clear change of domicile if you move, and consult a tax professional for complex situations.

Professional disclaimer: This article is educational and does not constitute personalized tax or legal advice. For advice tailored to your situation, consult a licensed CPA, tax attorney, or certified financial planner.