Most taxpayers must pay a state income tax as well as federal income tax on their earnings. But people who live and work in nine particular states don’t have to worry about paying state income taxes on their earnings because these states don’t tax their pay. While that may seem like a desirable situation, there are some tax consequences.
There are no personal income taxes as of 2012 in Alaska, Florida or South Dakota, but there are corporate income taxes. Nevada, Texas, Washington and Wyoming exempt both personal and corporate income from state taxes. Two other states levy no personal income taxes except on unearned investment income. New Hampshire imposes a 3.6 percent personal income tax on interest and dividends from stocks and bonds that exceeds $2,400 for singles and $4,800 for joint filers, but exempts retirees and disabled persons from the tax. Tennessee levies a 1.8 percent personal income tax on interest and dividends from stocks and bonds that exceeds $1,250 for singles and $2,500 for joint filers. Both states tax corporate income.
People who live in a non-tax state but work in a taxing state, or who work in a non-tax state but live in a taxing state don’t escape state income taxes. You will have to pay income taxes to the taxing state you work in if you reside in a non-tax state. Or you will have to pay income taxes to your state of residence if you work in a non-tax state. When both states impose income taxes, the state you live in normally lets you take a tax credit for taxes paid to the state in which you work.
Lost Federal Deduction
The federal tax code allows taxpayers to deduct state income taxes they pay, but those living and working in a non-taxing state have no income taxes to deduct. Until 2012, they could deduct the sales taxes they paid to their home state. Taxpayers in the other 41 states could choose between deducting state sales taxes or income taxes. But the sales tax deduction expired at the end of 2011 and, as of August 2012, Congress had not reinstated this deduction. Unless Congress acts, those living in states without an income tax won’t have any deduction for state taxes.
The states without income taxes meet their revenue needs from other state taxes. Florida, Nevada, South Dakota, Tennessee, Texas and Washington get the majority of their tax revenue from consumers through sales taxes and excise taxes on things such as cigarettes and motor fuels. New Hampshire, which has no sales tax, relies mainly on excise taxes and corporate income taxes. Alaska and Wyoming get most of their state tax revenue from oil and gas extraction taxes.
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