9 States With No Income Tax | BiggerPockets Blog

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State income taxes are often a complex topic with significant implications for real estate investors. Putting your money in states without income tax can be a smart idea and allow you to keep more money in your pocket each year.

Which countries have no income tax and does it make sense to invest in them? How should you think about structuring your home rental business to improve results? Understanding your potential tax liability in the nine states without income tax allows you to make the best decision for your next purchase.

Alaska tax rate

When it comes to states with the best income tax breaks, Alaska is among the highest. In addition to receiving money from Alaska Permanent Fund For each calendar year they live there, residents pay no personal income tax.

Instead of imposing an income tax on the state’s more than 730,000 residents, the state imposes business taxes on their various industries. a lot of State annual budget It comes from property taxes on oil, gas, raw fish, the hospitality industry, and fuel conversion taxes.

Implications for tax liability

Even though Alaska is a state with no income tax, that doesn’t mean you won’t have to pay anything for renting a property. If a small business controls your rent, you may be taxed between 2-9% based on your earnings. More than 20 municipalities in the state — including the largest cities of Anchorage, Fairbanks and Juneau — estimate an average per capita property tax of $2,276. You can also expect to pay local sales tax for this Home rental improvementsusually between 2-5%.

Florida tax rate

Florida is transforming from a home for retirees into a haven for businesses, entrepreneurs, and those seeking a break from states with high income taxes. The southernmost state in the “Lower 48” is perhaps the most famous of the states that does not charge an income tax on all that it has to offer tourists and residents.

Instead of a personal income tax, Florida collects revenue on many other products and services. The Sunshine State has one of the highest state taxes on gasoline at 43.55 cents a gallon, along with an average sales tax rate of about 7%.

Implications for tax liability

Owning real estate in Florida will come with property taxes, a combination of Ad Valorem taxes based on the value of the property, and non-values ​​based appraisals from local government services. Property owners can expect average state and local property taxes per capita $1,541 annually. Like individual state income tax, disregarded sole proprietors, one-member LLCs, and pass-through businesses that do not use Form 1120S to pay federal income tax are not required to file a business tax return. All other corporations, including out-of-state corporations and other LLCs, may be subject to Flat 5.5% tax.

Nevada tax rate

Possibly a direct result of the gaming industry, Nevada is also one of the states that does not charge income taxes. The state does not assess state corporate or corporate income tax to encourage entrepreneurs to relocate to it.

Instead of collecting state income taxes, Nevada has some of the highest sales and gasoline tax rates. combined State and local sales tax rate Averages about 8.23%, while the gas tax rate per gallon is 50.48 cents – the fifth highest in the United States.

Implications for tax liability

Owning real estate in Nevada comes with local property taxes. In the 2022-2023 fiscal year, County average tax rate On property is about 3.18%. Besides the high local taxes, the Tax Foundation He notes that the average property tax per capita is about $1,153 — still among the lowest in the country. Combined with no business or corporate income tax, Nevada may be one of the best states for owning rental property.

South Dakota tax rate

The home of Mount Rushmore and Deadwood Mountain is one of nine states that do not impose income tax on resident individuals. South Dakota is also one of the few states without a corporate income tax, allowing rental homeowners to create a structure that works best for their needs.

Like other states without income tax, South Dakota constitutes revenue from other taxes. Besides the annual property tax, businesses can expect to pay an average sales tax of 6.4% and gas taxes of 28 cents per gallon.

Implications for tax liability

Although there is no state property tax in South Dakota, local governments and special regions can assess property taxes within their jurisdictions. Property tax is based on the full market value of the land, with an average rate of taxes paid around 1.17%. Rental homeowners in the state can expect to pay a per capita average of $1,606 per year.

Texas tax rates

Everything is bigger in Texas — except for the individual income tax rate. While Texas has an extension Ninth largest economy in the worldThe state constitution states that it is one of the states with no income taxes.

In addition, the tax laws are favorable to new and small businesses growing in the Lone Star State. The state of Texas does not assess business taxes, personal income taxes, or other fees on sole proprietors, allowing them to continue to do so. Investing in real estate And their business grows over time.

Implications for tax liability

Although Texas does not impose a state property tax, more than 4,000 local entities collect property taxes. All property taxes are based on current market value and are the same across multiple tax regions. According to the Tax FoundationThe average per capita state and local tax burden on real estate is approximately $2,216. For domestic maintenance items, property owners can expect to pay sales tax of 8.2%

Washington tax rate

Known as the gateway to the Pacific Northwest, where the mountains meet the coast, Washington State is among the states with no income taxes. Individuals and corporations are not subject to state taxes, making it one of the best corporations in the United States.

This does not mean that everyone gets away with it without paying their fair share of government services. Washington has it too One of the highest combined state and local sales tax rates in the country by 8.86%. Government taxes on gas are also quite high, with drivers paying roughly 50 cents per gallon of fuel.

Implications for tax liability

The good news for landlords is that rental or rental property is habitable Exempt from state business and occupation tax, which reduces your total tax liability. However, property taxes may still apply depending on the location of your rental home. Homeowners can expect to pay an average per capita property tax of about $1,727 annually, making it a relative value.

Wyoming tax rate

Images of cowboys on the range often come to mind when we think of Wyoming. Most importantly for realtors, Wyoming is one of the states with no income taxes for individuals.

Instead, the state makes its income from the wealth of available resources. Mining operations for energy sources, including coal and oil, contribute significantly to the state’s tax base—giving residents and small businesses a break.

Implications for tax liability

Although there are no individual or corporate income taxes in Wyoming, homeowners must pay property taxes. On top of the average sales tax of 5.36%, the The average property tax per person is about $2,100.

New Hampshire tax rate

New Hampshire has a unique approach to taxation. While it’s a state where there is no income tax on W-2 wages, that doesn’t mean that taxpayers don’t owe anything at the end of the year.

Instead, individuals pay a 5% tax on dividends and interest income. The good news is that it does not apply to rental income – allowing you to reinvest more in your business.

Implications for tax liability

One downside Real estate investment rental In New Hampshire are property taxes. New England has one of the highest per capita state and local property taxes in the country, with The average earning is about $3,300. Additionally, depending on how your rental company is structured, you may pay additional corporate tax on your earnings.

Tennessee tax rate

The only thing the volunteer state does not require its residents to do is pay income tax. The country’s music capital is one of nine states with no income taxes.

But like New Hampshire, Tennessee’s taxes are more complex than the other states on this list. State residents are charged an annual tax on income from dividends and taxable interest, which includes interest and mutual funds, interest on bonds, and certain distributions to shareholders — not to mention One of the highest sales tax averages in the United States by 9.55%.

Implications for tax liability

As with other states that do not impose income taxes, Tennessee homeowners are subject to a local property tax. However, it is among the lowest of all 50 states. According to the Tax FoundationThe average estate tax collection per capita is $845. Besides real estate tax, the highest corporate income tax rate is 6.5%, which may affect you depending on how your rental company is structured.

Instructions

Why do states impose sales tax?

Point-of-sale sales taxes are levied to support local and state government services, subject to approval by voters and legislators. Four states — Delaware, Montana, New Hampshire and Oregon — have no sales tax, while Louisiana, Tennessee, Arkansas and Alabama have some of the highest taxes.

Is it better to live in a state with no income tax or no sales tax?

It depends on several factors, including taxable income, investment strategy, and the number of rental properties you manage. In general, higher earners can do better in a state with no income tax, as this allows them to better save and reinvest their earnings despite the higher sales tax.

What are the downsides of living in a country without income tax?

Living in a state with no income tax has two major downsides. First, state and local governments often make up the difference in the rise in sales, corporate, or property taxes. Second, a lower tax base often requires careful budgeting, which often means less money for infrastructure, such as schools.

Why does the sales tax differ from one country to another?

The United States Constitution allows the federal government to establish appropriate national taxes for the common good, including the military, federal highways, and other infrastructure. The Constitution also allows states to set their own taxes, making sales taxes a state issue. Therefore, different states, counties, and cities can set tax rates to reflect their budgets.

Why don’t more states have an income tax like Texas?

State and local tax policies and priorities determine, which vary from state to state. In the example of Alaska and Wyoming, higher taxes on natural resource extraction allow their governments to pass tax savings on to their residents.

Why do some states have higher taxes than others?

Each state government prioritizes its budgets based on many factors, including population, natural resources, industries, and businesses. As a result, government income and sales taxes reflect the various sources of income available to the government.

Which US territories do not pay federal income taxes?

Residents of five US territories are not subject to payment of federal income tax to the US government: American Samoa, Guam, Puerto Rico, the Commonwealth of the Northern Mariana Islands, and the US Virgin Islands.

Note by BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.