States with no income tax on capital gains

As of 2021, eight states — Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington and Wyoming — do not levy a state income tax. A ninth state, New Hampshire, does not tax earned income, but it does impose a 5% tax on dividends and interest. This is set to expire in 2027.

Here’s a breakdown of what it means to live in a state without income tax, what benefits you might enjoy and what drawbacks you could expect. Plus, see a quick head-to-head analysis of how these nine states with no income tax match up regarding other taxes and living costs.

What does it mean to live in a state with no income tax?

At the most basic level, living in a state with no personal income tax means that you’ll get to keep a little bit more of your paycheck. And if you’re currently living in a state with high personal income tax rates like California (where some people might see portions of their income taxed at 13.3%), it can seem tempting to pack your bags and book a one-way ticket to Washington. However, moving to a state without an income tax does not mean that you will be excused from paying other taxes. If you meet the income qualifications for filing a federal return, you’ll still be expected to do so by the tax-filing deadline.

Pros and cons of living in a state without income tax

Most people can expect to pay at least some taxes during retirement — whether on 401(k) distributions, pensions or Social Security benefits. However, residents of states without personal income tax generally get to skip paying state taxes on retirement plans, which can mean more money for your golden years.

Avoiding additional taxes can be a nice retirement perk, but make sure you weigh the tax benefits of moving against other important financial (and personal) considerations. For example, some states have fewer options for public transportation, less affordable health care, higher property taxes or minimal funding for senior care programs. You might also not wish to live far away from friends or close family.

State taxes are often used to generate revenue for services such as health care or to fund infrastructure. Without this revenue stream, some states end up relying more heavily on other taxes, such as property or sales, to recoup the loss. So if you're a homeowner who currently lives in a state with relatively affordable property taxes, it may not be worth giving that up. And, importantly, living in a state with no income tax also means you might not be able to take full advantage of the state and local tax deduction if you itemize on your federal return.

On the plus side, except for New Hampshire, living in an income-tax-free state does mean that any capital gains you earn are protected from state taxes. This means that you’ll be liable only for any capital gains taxes on the federal level, which are calculated based on how long you held the asset before selling it.

Several conditions need to be met to reap the benefits of living in an income-tax-free state. Establishing domicile, or the intention of making a state your permanent home, is the most critical one. Rules and requirements vary from state to state, but generally, you must live in a place for at least half of the year, 183 days, to begin qualifying as a permanent resident. In addition, states conduct residency audits, so this will require proof.

Tread carefully here. People who live in one location (say, New York) but spend a good part of the year in another state (say, North Carolina) could be considered a permanent resident of one state and a “statutory resident” of the other for tax purposes. This means they could end up paying taxes on earned income in both states. Tax planning with a professional is one of the best ways to avoid finding yourself in a sticky tax situation.

Cost (and quality) of living

Perhaps the most critical number to crunch is your cost of living. This includes tallying up the costs of housing (rental or purchase), food, wages, health care and lifestyle. The savings you gain on state taxes might not be worth the extra cost incurred to live comfortably in another state. For example, someone currently residing in Buffalo, New York, on a $55,000 salary would need to earn over $70,000 to maintain their standard of living in Anchorage, Alaska.* That’s an extra $15,000 you’ll have to earn to account for higher housing, food, transportation, and health care costs.

Think about your job as well. Remote work is expanding, making it easier than ever to envision moving without risking job security. But if you were to live in a state with limited opportunities in your particular industry and something disrupted your employment, you could face difficulties securing another job.

*This hypothetical example was derived using our cost of living calculator. Prices and calculations will fluctuate based on inflation, among other factors.

How the 9 states with no income tax stack up

America’s largest state is also considered one of the most tax-friendly. When Alaska repealed its personal income tax in 1980, it began to tax companies involved in oil and gas production at high rates to generate revenue. The state’s mean effective property rate is 0.98%, and Alaska’s overall state and local tax burden is 5.8%, the lowest in the nation. On the downside, Alaska is remote — and expensive in other ways. U.S. News & World Report ranks Alaska an overall 47 out of 50 on its affordability list, making it the fourth-lowest ranking state in the country. Contributing factors include higher-than-average housing costs and a steep cost of living relative to median family incomes. Most residents can receive an annual stipend, the Alaska Permanent Fund Dividend, of up to $2,000, which might help offset some costs.

This southern state is a popular retreat for vacationers and retirees alike. Florida generates most of its revenue from state and local sales tax and tuition through state universities. This makes for an overall state and local tax burden of 8.8%. While cost of living might not be a deal-breaker for most people, Floridians may still have to contend with a competitive housing market and prices. U.S. News & World Report ranks the state at 41 out of 50 for housing affordability.

Nevada’s overall state and local tax burden is 9.7%, which is on the high side. Most of the tax burden is driven by sales and excise tax, including groceries and alcohol, and taxes on hospitality and tourism-heavy industries such as hotels and gaming. Nevada is routinely ranked at the lower end of the scale when it comes to affordability. U.S. News & World Report positions the state overall at 41 out of 50, with a particular nod to high housing costs. The effective property tax rate, on the other hand, is 0.56%, the ninth-lowest in the country.

Unlike other states on this list, New Hampshire still taxes dividends and interest on investment income at a 5% rate. This is set to phase out by 1% each year until it reaches 0% in 2027. The state also doesn’t impose sales taxes but levies excise taxes on goods such as tobacco. According to the Tax Foundation, the overall state and local tax burden is 9.7%. New Hampshire also ranks well for housing affordability, but the cost of living and property taxes is where it falls short. The state’s mean effective property tax rate is 1.89%, making it the third-highest in the country, trailing behind Illinois (No. 2) and New Jersey.

South Dakota, home to Mount Rushmore and Badlands National Park, is often lauded as one of the top locations for retirees. For affordability, South Dakota stakes a claim for the highest-ranking state on this list: U.S. News & World Report ranks it at 14 out of 50 nationally for its combined housing and cost of living scores. South Dakota’s overall sales and local tax burden is 9.1%; the state depends on sales and excise taxes to generate revenue, levying taxes on items such as tobacco, motor fuel and alcohol. Homeowners might not love the effective property tax rate of 1.14%, though, which places it above many other states.

In 2017, Tennessee began the gradual repeal of the Hall Income Tax, which taxed interest and dividends on investment income. The phaseout played out over several years, leading up to its complete elimination in 2021. According to the Tax Foundation, Tennessee does impose a relatively high sales tax, and it charges tax on items such as alcohol, beer, fuel and even fantasy sports contests. Yet, its overall tax burden is 7%, the second-lowest in the country (tied with Wyoming and bested only by Alaska). In addition, Tennessee's effective property tax rate is 0.63%. As for affordability, the Volunteer State also shines here. U.S. News & World Report ranks it an overall 17 out of 50.

Texas is the second-largest state in the U.S., and it’s widely known for its “go big or go home” attitude. In fact, Texas’ aversion to income taxes is so strong the ban is listed in the state constitution. The overall state and local tax burden is 8%, making it one of the lowest in the country, but the effective mean property tax rate, at 1.6%, is the sixth-highest in the nation. However, living in Texas has its perks outside of taxes: U.S. News & World Report ranks the state as a solid 22 out of 50 for its overall affordability and 14 out of 50 for the cost of living.

Not only does the Evergreen State not have income tax; it also doesn’t impose a corporate income tax. This incentive is no doubt appealing to the many major corporations that are headquartered in the state. Washington’s overall sales and local tax burden is 9.8%, which is relatively average. Where Washington falls short is affordability. It takes the 44th spot on U.S. News & World Report’s affordability scale, with high housing costs being the primary driver.

Wyoming is the least populated state in the U.S., with a total of 576,851 residents calling it home, according to 2020 Census data. The Cowboy State has an overall sales and local tax burden of 7%, the second-lowest in the nation (tied with Tennessee). Because there’s no income tax, the state relies on property, oil, sales and excise tax to generate income. Wyoming scores slightly above average when it comes to cost of living and housing — U.S. News & World Report gives it an overall affordability rank of 33 out of 50.

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