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
- 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?
Kevin McKee is an entrepreneur, IT guru, and personal finance leader. In addition to his writing, Kevin is the head of IT at Buildingstars, Co-Founder of Padmission, and organizer of Laravel STL. He is also the creator of www.contributetoopensource.com. When he’s not working, Kevin enjoys podcasting about movies and spending time with his wife and four children.
My mom lives in New Hampshire and pays a TON for property taxes. She pays like $6,000 per year. And I THINK I heard they put on a state income tax for income over $40,000 but I’d have to look that up to be sure.
My dad lives in Wyoming. Apparently my parents love them some no state taxes. I don’t know what my dad pays for property taxes.
Property taxes can be a lot. That’s why it’s really important to take the entire tax picture into account before moving.
I live in wyoming and I ALSO Love me some no state taxes. Property taxes depend on the county you live in, but from what I’ve heard are relatively reasonable.
Theoretically, you pay more property tax to balance it out – which then becomes “avoidable” by renting, but your rent jumps up. From what I hear, Texas is a pretty cheap property state though.
Also theoretically, if the cost of living (including taxes) is really lower there, then your salary is proportionally lower. Again, I don’t really buy this, and wrote a post once that compared salaries and property values across different states and cities – turns out you *don’t* get paid enough extra to make up for the high housing costs in San Francisco… (since it has so many other reasons to live there, you gotta pay a premium to do so!)
I don’t think that I would consider moving to reduce my tax bill. Even for retirement, I’d rather move to a place that I know I’ll really love. Possibly if there were a couple places I was deciding between, then I would consider tax rates.
All those are very good points. However, I don’t believe a lower cost of living means a lower salary. At my company, everyone is paid on the same scale unless you are in NYC/Chicago/LA or wayyyyy out in the boonies where things are dirt cheap. There is a huge cost of living difference between Dallas and somewhere like San Francisco, but it’s the same pay rates.
Not so sure about the comment that TX has the highest property taxes. I have lived in several states including PA and NY. Now that I live in TX I can tell you with certainty that TX property taxes are MUCH LESS than both PA and NY. MUCH, MUCH LESS!! For example, my mom owns a home in Rochester, NY, she pays over $5,000 per year for a home in property tax that she paid $104,000 for. My dad owns a similar home in Weslaco, TX and pays less than $1,000 in property tax!
I live in the Georgetown, TX area and my similar sized home cost me HALF what it cost in PA and the taxes are about 1/4 what they were in PA!!! I love TX for taxes.
On a per mil basis I think you’ll find that TX is often less than most areas of the Northeast and CA. Of course, it does matter where you live in TX, maybe Houston has an outrageous property tax – no info there.
I had it wrong. Looks like Texas is number three, as of about a year ago.
http://dallasdirt.dmagazine.com/2010/10/05/texas-property-taxes-third-highest-in-nation-percentage-of-median-value/
Good catch.
The main reason Texas does not have income tax is because the state gets a hugh amount of its revenue from OIL producers. Here in Oklahoma, all the mineral rights were given to the Indian nations who get a huge amount in oil producing taxes so none of it goes to the state but instead goes to the Cherokee, Osage, and other nations, but Texas’ mineral rights are owned by individuals so they pay tax to the state of Texas on every barrel produced..
When I lived in New York I paid INCOME taxes in Westchester County (where I lived), NYC INCOME taxes (where I worked) and state and federal income taxes. Needless to say I enjoy the cost of living in Utah a whole lot more. I don’t know how my family still lives there.
IL taxes just went up this year from 3% to 5%.
Fortunately the calculation is a little more generous than 5% of your sallary. The basis is federal AGI less/plus some atypical deductions, and then $2k IL personal/dependent deduction(s) (and $1k possible other allowances). As an example, deductable retirement contributions are included in the deductions to reach federal AGI.
Circumstances dictate I stay in IL for now at least.
Gosh, you should never move here!! In The Netherlands we pay 42% income tax. And of course there is also VAT (19%) and property tax and water tax and city tax and, and, and… 🙁
The government gives us something in return though: Those who cannot work, get social security at minimum wage level.
The drawback is that there are many who CHOOSE not to work, because making minimum wage for sitting on your *ss all day seems like a sweet deal to them.
Please can I come live near you??? 🙂
Thank you, again, for putting this together and for making all of our lives easier!
Interestingly most of the studies show rich people don’t move to get lower taxes – even though that is what economist say they should do.
I’d live in Texas – in fact, I’ve already proposed to my fiance that we spend a few years in Texas to save up because everything is so darn cheap! (especially when you compare it to California). But man, there’s a reason why folks live in CA. I call it the sunshine tax.
Thanks for the tips. Looks like they worked for you…i haven’t read all the comments but I’m pretty sure that’s been said already.
Perhaps your experience is different, but I lived in Texas for 17 years (trying desperately to get out the last five or so), and now that I’ve left you’d have to lasso me and drag me kicking and screaming to ever move back.
So yeah, some places may be cheaper to live in… but they’re usually soul-crushingly horrible (here I speak specifically of Houston, but for me most of Texas was this way). Now I pay more taxes, but for those taxes I have health care, a functional education system, and no longer fear being shot for looking at someone the wrong way (more common in Texas than you’d think).