On average, Americans pay over $16,600 in federal income taxes. This might seem like a lot, but those in the most common tax bracket actually pay just over $4,500, which should come as a slight relief.
However, you must pay state income taxes on top of federal ones, and this can add financial pressure. But the good news is that there are a few tax-free states that’ll alleviate your burden. If you form a business in these areas, then you can minimize costs and enjoy higher profits.
So what states have no income tax? Read on to find out.
What States Have No Income Tax?
As of February 2024, nine states don’t have income tax. They are as follows:
- Alaska
- Florida
- Nevada
- New Hampshire
- South Dakota
- Tennessee
- Texas
- Washington
- Wyoming
However, this doesn’t necessarily mean you won’t be taxed on money coming in. Below are what you can expect from each state.
New Hampshire
Prior to 2024, New Hampshire had a 4% tax on dividends and interest. However, this rate dropped to 3% in 2024. The good news is that after 2025, there will be zero tax on dividends and interest.
Tennessee
Tennessee used to tax investment income. However, starting from the 2021 tax year, the state repealed all taxes regarding income from interest and dividends.
Washington
If you’re employed in the state of Washington, you won’t pay state income taxes. However, as of July 2023, thanks to the WA Cares Fund, 0.58% of all your earnings go toward the state’s long-term care insurance. There are four exemption types as of January 1, 2023, so find out if you qualify.
In addition, there’s a 7% long-term capital gains tax if you sell any assets for $250,000 or more.
Which Tax-Free States in the US Are Good for Business?
Do you want to pursue your passion and create a business? Then Business Anywhere can help with our business formation service. We can get you registered in all 50 US states with little trouble.
But before you jump into forming a limited liability company (LLC) or corporation, you need to figure out where you want to base your business. This is where you’ll potentially pay state taxes, so naturally, you should look at the tax-free states from above.
It can be difficult to determine which is ideal for you, so here’s some additional information.
Alaska
Alaska isn’t commonly chosen, but it’s fine and it works. So if you want to think outside the box and have a unique business address, Alaska is a good contender.
Florida
While Florida is a tax-free state, it’s not ideal for people with single-member LLCs especially those with significant assets. In June 2010, the Florida Supreme Court ruled that the charging-order protection wouldn’t apply to single-member LLCs, which means that your assets are subject to seizure.
Wyoming and Nevada
These two states are pretty equal, so either is a great choice. Essentially, Nevada copied all of Wyoming’s statutes, which put them on an even playing field.
Do note that in Nevada, you’ll have to disclose the LLC manager’s name in the filing of annual reports. In addition to paying fees, you’ll have to get a state business license as well, so it’ll be more expensive than forming an LLC in Wyoming.
States With the Highest Income Tax
You now know the states with no income tax. But which ones have the highest, so you know what to avoid?
California takes the number one spot, with an income tax rate of 14.40% in 2024. Next is Hawaii at 11%. The following states all have income tax rates of around 10%:
- New York
- New Jersey
- District of Columbia
- Oregon
- Minnesota
LLC vs Corporation
When considering your options for business structures, you’ve probably looked at the pros and cons of LLCs and corporations.
One of the biggest benefits is that LLCs don’t pay tax anyway. It’s not a taxable entity, and profits pass through to the owner. So even if you were in a high-tax state such as New York, if you’re not a resident, you won’t pay state income taxes anyway as an LLC owner.
On the other hand, it’s different for corporations. If you decide on a corporate business structure, then you’ll want to be in a zero income tax state.
Pick a Good State to Be a Tax Resident In
In this article, we’ve discussed the answer to the question, “What states have no income tax?”
In short, nine states in the US don’t have income tax requirements. However, there are some factors to be aware of, such as taxes on dividends, interest, and long-term capital gains.
Whether you’re a digital nomad who needs to pick a state for tax residency or you’re an entrepreneur who has to pick a state for business formation, you should take your time to research the advantages and disadvantages first. Taking time to fully understand the whole picture can save you a whole world of trouble (not to mention money!) further down the road.
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