10 Most Tax-Friendly States in the U.S.
Given a choice of several job opportunities across the country, or several contiguous states in which to live for a job in the area, don’t overlook the impact of state and local taxes on your household finances. These ten states impose some of the lowest taxes in the U.S., according to Kiplinger’s analysis of state tax rules. Please have a look.
State taxes and the ways they are collected vary significantly across the country. For example, some states with low-income taxes impose above-average sales or property taxes, says Meg Wiehe, state tax policy director for the Institute on Taxation and Economic Policy, a nonpartisan group. Most states allow cities and counties to add their own sales taxes, which can boost combined sales taxes in some cities to 10% or more.
It’s also important to consider potential trade-offs. Low tax revenues may give a state less money to spend on education, transportation, public safety, and other services important to you and your family, Wiehe notes. Low taxes don’t necessarily lead to a higher quality of life.
1. Delaware
State income tax: 2.2%-6.75% (will decrease to 6.6% on January 1, 2014)
State sales tax: None
Gas taxes and fees: $0.23 per gallon (National average is $0.31)
The First State is first on our list for taxpayers. It has no sales tax, and its income tax rates are modest. They range from a low of 2.2% on taxable income of $2,001 to $5,000, to a high of 6.75% on taxable income above $60,000. The top rate will decrease to 6.6% on January 1, 2014.
Delaware also has some of the lowest property tax rates in the U.S., according to the Tax Foundation. The median property tax on the state’s median home value of $249,400 is $1,078, low compared to other states. Excise taxes on beer and wine are also modest: 16 cents per gallon for beer and 97 cents for a gallon of wine. You’ll pay only $1.60 in state taxes for a pack of Marlboros.
2. Wyoming
State income tax: None
State sales tax: 4%
Gas taxes and fees: $0.24 per gallon
Thanks to abundant revenues from oil and mineral rights, residents of the Cowboy State shoulder one of the lowest tax burdens in the U.S. (Note: Alaska pays individuals some of the revenues from its taxes on energy companies, but The Last Frontier has relatively high property taxes, so it isn’t on our list.)
Prescription drugs and food for home consumption in Wyoming are exempt from state sales taxes. But counties can add up to 3% in additional sales levies. The median property tax on the state’s median home value of $184,000 is only $1,058, according to the Tax Foundation. The tax on beer is two cents per gallon, the lowest in the U.S.
3. Louisiana
State income tax: 2%-6%
State sales tax: 4%
Gas taxes and fees: $0.20 per gallon
The Pelican State’s tax rates are low, and residents can deduct all of their federal income tax from state taxable income. Income tax rates range from 2% on less than $12,500 of taxable income to 6% on more than $50,000 of taxable income.
Property taxes are the lowest in the nation. The median property tax on the state’s median home value of $135,400 is just $243, according to the Tax Foundation. While the state sales tax rate is low, local parishes and jurisdictions may add their own sales taxes, which can boost the total to 10.75%. Gas taxes are 20 cents a gallon, well below the national average of 31.1 cents per gallon.
4. Mississippi
State income tax: 3%-5%
State sales tax: 7%
Gas taxes and fees: $0.19 per gallon
The Magnolia State is home to some of the lowest property taxes in the nation. The median property tax on the state’s median home value of $98,000 is $508, according to the Tax Foundation. Gas taxes are below the national average. Income tax rates are modest, although the top rate of 5% kicks in once taxable income exceeds just $10,000. And Mississippi is one of a minority of states that charges sales tax on groceries. Prescription drugs, residential utilities, motor fuel, and newspapers are exempt, however.
Vehicle sales are taxed at 5%, two percentage points below the general sales tax rate. Mississippi charges an annual personal property tax based on vehicles’ age and value. Rates are set at the county level. In Lamar County, for example, it’s $305 for a vehicle valued at $20,000.
5. Arizona
State income tax: 2.59%-4.54%
State sales tax: 5.6%
Gas taxes and fees: $0.19 per gallon
The Grand Canyon State’s income tax rates are modest. The top rate is 4.54%, and that doesn’t kick in until taxable income exceeds $150,000 for single filers or $300,000 for married couples. State gas taxes are below average. Like most states, Arizona excludes prescription drugs and food for home consumption from state sales taxes. However, all 15 counties levy an additional tax that ranges from 0.25% to 2%, and some extend that tax to apply to groceries.
There is also an annual vehicle license tax. The tax is based on an assessed value of 60% of the manufacturer’s base retail price, reduced by 16.25% for each year since the vehicle was first registered in Arizona. The rate is $2.80 for new vehicles and $2.89 for used vehicles, for each $100 of assessed value. So for a vehicle costing $18,000, the vehicle license tax for the first year would be $302.
The median property tax on the state’s median home value of $187,700 is $1,356, according to the Tax Foundation.
6. Alabama
State income tax: 2%-5%
State sales tax: 4%
Gas taxes and fees: $0.21 per gallon
The Yellowhammer State keeps its property taxes rock-bottom. Income tax rates are modest, too, with a maximum rate of 5% on taxable income of more than $3,000 for single filers and $6,000 for married couples. Alabama also allows residents to deduct all of their federal income tax from state-taxable income.
While the state’s sales tax is 4%, additional levies from cities and counties boost the state average to 8.5%. And Alabama is one of a minority of states that don’t exempt food from sales taxes. Prescription drugs and insulin-related items are exempt, however. The median property tax on the state’s median home value of $119,600 is a low $398, according to the Tax Foundation. Alabama also has one of the lowest cigarette tax rates in the U.S., at just 43 cents per pack.
7. Nevada
State income tax: None
State sales tax: 6.5%
Gas taxes and fees: $0.33 per gallon
The Silver State is one of nine in the U.S. that impose no income tax. And unlike some other no- or low-income tax states, Nevada doesn’t make up for lost revenue with high property taxes. The median property tax on the state’s median home value of $207,600 is $1,749, below average for the U.S., according to the Tax Foundation.
Food and prescription drugs are exempt from the state’s 6.5% sales tax. But counties may tack on up to 1.25%. In addition to sales taxes, vehicle owners are charged an annual “government services tax” that’s based on the vehicle’s value and age. Tax on a two-year-old vehicle with an original sticker price of $20,000 would be $298.
8. South Carolina
State income tax: 3%-7%
State sales tax: 6%
Gas taxes and fees: 0.17 cents per gallon
The Palmetto State’s top income tax rate of 7% kicks in once taxable income exceeds $14,250.
Groceries and some cold-prepared foods, prescription drugs, dental prosthetics, and hearing aids are exempt from state sales taxes. Localities can add up to 3% in sales taxes. But the state’s gas tax is well below the national average at 17 cents per gallon.
In addition to the state sales tax, South Carolina levies an annual tax on vehicles. Rates are set by counties. The average annual tax for a vehicle valued at $10,000 is $268. Property taxes are among the lowest in the U.S. The median property tax on the state’s median home value of $137,500 is $689, according to the Tax Foundation.
9. New Mexico
State income tax: 1.7%-4.9%
State sales tax: 5.125%
Gas taxes and fees: 0.19 cents per gallon
Personal income tax rates in the Land of Enchantment top out at 4.9% on taxable income over $16,000 for single filers and $24,000 for married couples filing jointly. Gas taxes are below average for the U.S. Car buyers get a break: Sales taxes on motor vehicles are 3%, well below the overall sales tax rate.
Property taxes are among the lowest in the country. The median property tax on the state’s median home value of $160,900 is $880, according to the Tax Foundation. The state levies a sales tax of 5.125%, which is imposed on businesses and typically passed on to consumers. County and city sales taxes may add up to 3.56%. And unlike most states, New Mexico doesn’t exclude food from sales taxes, although prescription drugs are exempt.
10. West Virginia
State income tax: 3%-6.5%
State sales tax: 6%
Gas taxes and fees: 0.35 cents per gallon
The Mountain State’s property taxes are among the lowest in the U.S., according to the Tax Foundation. The median property tax on the state’s median home value of $94,500 is $464. Income tax rates are also modest. They range from a low of 3% on up to $10,000 of taxable income to a high of 6.5% on taxable income of $60,000 or more.
Nonprepared food and prescription drugs are exempt from the 6% state sales tax, and vehicles are taxed at 5%. Municipalities may add a local tax of up to 1%. Gas taxes are above the national average, but the tax on beer is low, at just 18 cents per gallon.