Retirement: No-Income-Tax States Not Always Best Deal

Many retirees choose to move to states that have no income tax. While this can be beneficial in certain situations, it may not always be the best deal available. Here are a few things to consider about how moving to a no-income-tax state might not help you.

No-Income-Tax States

As of May 2010, there are currently seven states that would fit into this category. When you live in one of these states, you will not have to pay any state income taxes for the year. You will still have to pay federal income tax, though. These states are Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming. 

Property Tax

Although you will not have to pay any state income tax in these places, you might need to watch out for property taxes instead. Many of these states try to make up for their lack of income tax by charging excessive amounts of property tax. This means that if you are going to own real estate in the state, you should be prepared to pay handsomely. If you own any other property such as a car, this will also be taxed at a higher rate for personal property taxes.

Sales Tax

Another way that many of these states attempt to make up for lack of income taxes is with sales tax. Most of the time, the sales tax rate is going to be substantially higher in these states. This means that every time you purchase something in the state, you are going to be paying more money for it. For example, if you live in Florida, you need to be prepared to pay higher rates for gasoline. Their gas tax is $.34 per gallon. With the already high prices on gasoline, this can make buying gas pretty unbearable. Every time that you go to the store, this increased sales tax rate is going to take a bite out of your budget.

Sin Taxes

Many of these states also choose to make up for lack of income tax by charging excessive sin taxes. Sin taxes are taxes on things that are considered "sinful" activities. For example, these states are going to charge more for tobacco and alcohol products. If you live in Alaska, you should be prepared to pay a $2 sales tax on a pack of cigarettes. You will also have to pay $12.80 in taxes on 1 gallon of alcohol in Alaska. If you regularly purchase these kinds of products, you could use up a large portion of your expendable income on the taxes.

Choosing a Place to Live

If you are considering moving to one of these no-income-tax states, you will want to look at all of the factors involved. Just because a state does not have a sales tax does not necessarily mean that it is going to be any cheaper for you to live there. Look at the entire financial picture before making a decision about where you want to live.

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