What would you say if I could instantly get you an 11% raise on your income?

Well if you are a high earner in Hawaii or Oregon, then I propose you move to Texas and your 11% state tax rate will be reduced to 0%.

I’ve said it before and I’ll say it again; every dollar you pay in taxes is a dollar that you could have used to pay down debt, invest, donate to charity or buy something you want. That’s why economics and politics are so important when looking at your personal finances.

However, most economic and political theory is just that; theory. In most cases the only way to make tangible changes in your personal finances is to wait for your next election and vote for the politician you agree with. Economics and taxes are important matters to be discussed for the long term, but don’t provide many short term actionable items.

Local taxation is one exception. All it takes is a little bit of relocation to save a lot of money if you currently live in a highly taxed area.

Local Taxation Can Be Expensive

I live in Texas where we don’t have a state income tax. I also don’t have country or city income tax. The federal government gets their piece, but I get everything else. Now compare that to a state like Illinois, where every dollar I make would have been taxed at 5%.

If I have a salary of $50k a year, I would be paying $2,500 in Illinois state taxes, compared to $0 in Texas. Plus, Illinois might add on some county or city taxes to get an even bigger slice of my money. Look at what you can get for $225. Moving out of Illinois can save over 10 times that amount!

Here is a list of states that have no earned income tax (as of 2011):

    alaska on pavement

    photo credit: flickr.com/wonderlane/

  • Alaska
  • Florida
  • Nevada
  • New Hampshire
  • South Dakota
  • Tennessee
  • Texas
  • Washington
  • Wyoming

Understand the Full Tax Picture

You can save money in lower income taxes by moving states, but it’s also important to consider things like sales and property taxes, which can account for some of the differences. Just because you escape income tax doesn’t mean you are escaping taxes altogether.

For example, Texas does a good job of keeping income taxes at 0% but they actually have the highest property taxes in the nation. That can increase cost of living (although cost of living is still incredibly low in Texas) and raise your overall tax bill.

Here is a great article that gives an overall picture of the most tax friendly states. I wish I lived in Alaska in 2008 when they gave every resident a check for $3,269. Now that’s what I call a helpful government.

I would love to hear from my readers. I’m pretty happy about my tax situation in Texas. How do you feel about your state and local taxes, and would you ever consider moving to reduce your tax bill?