7 States with No Income Tax
Most states levy a cover charge for individuals known as personal income tax. That tax can add significantly to the federal tax burden placed on an individual or a family. The states with the highest rates of personal income tax are:
- Vermont - 9.5% maximum
- California- 10.3% maximum
In Vermont, the maximum total tax burden on an individual, including federal tax at the highest rate of 35%, is a shocking 44.5% of that person's income. In California, due to a 1% mental health tax charged on incomes of over $1,000,000, the maximum total tax burden can be up to 45.3% of a person's income.
With such high rates of personal income tax in many states, it leaves many wondering if there is way to reduce taxable income.
Federal Income Tax - Is it Constitutional?
States with No Income Tax
While there are many strategies to reduce taxable income - which are beyond the scope of this article - there is one sure-fire way to reduce income taxes on that income. You can choose to reside in one of the seven states that do not levy personal income tax:
Two other states, New Hampshire and Tennessee, impose taxes for individuals only on dividend and interest income. In fact, in 1960 the Tennessee Supreme Court ruled tax on personal income to be unconstitutional in its decision in Jack Cole Company v. Alfred T. MacFarland.
Do States with No Income Tax Compensate with Higher Sales Tax?
Do states with no income tax compensate by charging higher sales tax in order to raise revenue? Of the seven states that impose no income tax, along with New Hampshire and Tennessee, four charge among the highest sales tax rates in the country:
- Nevada - 6.5%
- Tennessee - 7.0%
- Texas - 6.25%
- Washington - 6.5%
Despite the availability of this alternate tax to raise revenue, Alaska and New Hampshire are two states that charge NO SALES TAX, in addition to charging no personal income tax.
Do They Make it Up in Corporate Income Taxes?
Do the seven states that charge no personal income tax, with the addition of New Hampshire and Tennessee, make it up by charging higher corporate income taxes?
- Alaska. Well, Alaska certainly tries. Their graduated income tax rates top out at 9.4% for corporate income of over $90,000.
- Florida. Florida charges a flat corporate income tax rate of 5.5%, or the higher of of the flat rate or 3.3% alternative minimum rate, for taxpayers who owe federal AMT.
- Nevada charges NO corporate income tax.
- New Hampshire has two separate corporate taxes: the BPT (Business Profits Tax) and BET (Business Enterprise Tax). New Hampshire charges 8.5% BPT for corporations with gross receipts over $50,000. BET is a 0.75% tax on enterprise value tax base on corporations with gross receipts of over $150,000 or an enterprise value tax base over $75,000.
- South Dakota charges NO corporate income tax, only a 6% assessment on net income of banks.
- Tennessee charges 6.5% corporate income tax and a franchise fee of 0.25% of the greater of net worth or real or tangible property.
- Texas charges NO corporate income tax, only a 1% franchise tax, which is a tax assessed on gross receipts of most taxable entities.
- Washington charges NO corporate income tax, but assesses a tax on gross receipts called the Business & Occupation (B&O) Tax.
- Wyoming charges NO corporate income tax.
Federal Income Tax - Is it Constitutional?
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For individuals and families looking for tax-friendly states in which to live, all these states are great choices, but with Alaska (break out the Snowmobile) and New Hampshire offering both no personal income tax and no state sales tax, they are standouts.
For businesses looking for tax-friendly states in which to locate, Nevada, South Dakota, Texas, Washington, and Wyoming are all good options, as they offer limited or no corporate income tax, as well as no personal income tax.
For all my fellow small business/entrepreneur friends, a word of caution. Please do NOT incorporate in one of these tax-friendly states unless you plan to locate there and do substantial business in the state. The legal term is 'nexus'; there must be a strong connection between you, your business, its location, and the area in which you do the majority of your business. This way, you will avoid a heap of trouble with your home state's department of revenue that even a team of fancy CPAs can't get you out of.
Why not consider taking advantage of your right to 'vote' for the most fiscally responsible state government possible - with your choice of personal and/or corporate residence - if you have the inclination and the opportunity to do so. You have everything to gain, except more taxes.
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