Back in March, WalletHub released a tax survey spanning the responses of over 480 Americans, and not surprisingly the results showed that we generally hate paying taxes, even though most folks realize they're necessary to fund the federal government and important social programs.
Here's a brief sampling of the highlights:
- Nearly 24% of respondents would get an "IRS" tattoo if it meant never having to pay federal tax again.
- 51% of respondents would rather spend the day doing jury duty than preparing their taxes.
- Roughly one in 20 respondents liked North Korea more than the IRS.
- And perhaps my personal favorite, 11.6% would rather spend the night in jail than doing their taxes.
IMAGE SOURCE: GETTY IMAGES.
Nine states won't tax your earned income -- but 41 will
But what you're probably overlooking is that most states tax your wage income as well. Of course, unlike the federal government, which puts forth a one-size-fits-all progressive tax bracket for all taxpayers, state income tax rates can vary dramatically based on where you live and/or how much you make.
Right now, there are nine states that don't go after a penny of your wage income. This includes seven states that have absolutely no state income tax whatsoever -- Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming -- as well as two states that only tax dividend and interest income over a certain threshold: Tennessee and New Hampshire. However, it's worth pointing out that the Hall income tax in Tennessee is being gradually phased out and will be gone completely by 2021. Thus, in 2021, eight of these nine states will be completely free of an income tax.
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Eight of these 41 income-tax states offer a flat tax
On the other hand, it means that 41 states will tax your wage income to some varying degree. First, let's look at the eight states that offer a flat income tax, regardless of how much you've made:
- North Carolina: 5.75%
- Massachusetts: 5.1%
- Utah: 5%
- Illinois: 4.95%
- Colorado: 4.63%
- Michigan: 4.25%
- Indiana: 3.3%
- Pennsylvania: 3.07%
While paying any tax to your state of residence probably isn't ideal, the flat tax in all eight of these states is well below the peak marginal state income tax rate offered by a good portion of the remaining 33 states. Put in another context, if you're making a good amount of wage income and you choose to live in a state with an income tax, these eight are probably smart choices, as they'll allow you to avoid considerably higher income-tax rates in select states, as you'll see.
33 of 41 states tax wage income on a progressive scale
Then, there are the remaining 33 states that go after your hard-earned income based on how much you've made. Some states among these 33 are exceptionally accommodative to their residents, while others turn the wealthy upside-down and don't stop shaking until all the loose change has come out.
| State | Income Tax Range | State | Income Tax Range |
|---|---|---|---|
| California | 1% to 13.3% | West Virginia | 3% to 6.5% |
| Oregon | 5% to 9.9% | Georgia | 1% to 6% |
| Minnesota | 5.35% to 9.85% | Kentucky | 2% to 6% |
| Iowa | 0.36% to 8.98% | Louisiana | 2% to 6% |
| New Jersey | 1.4% to 8.97% | Missouri | 1.5% to 6% |
| Vermont | 3.55% to 8.95% | Rhode Island | 3.75% to 5.99% |
| New York | 4% to 8.82% | Maryland | 2% to 5.75% |
| Hawaii | 1.4% to 8.25% | Virginia | 2% to 5.75% |
| Wisconsin | 4% to 7.65% | Oklahoma | 0.5% to 5.25% |
| Idaho | 1.6% to 7.4% | Alabama | 2% to 5% |
| Maine | 5.8% to 7.15% | Mississippi | 3% to 5% |
| South Carolina | 0% to 7% | Ohio | 0.495% to 4.997% |
| Connecticut | 3% to 6.99% | New Mexico | 1.7% to 4.9% |
| Arkansas | 0.9% to 6.9% | Kansas | 2.7% to 4.6% |
| Montana | 1% to 6.9% | Arizona | 2.59% to 4.54% |
| Nebraska | 2.46% to 6.84% | North Dakota | 1.1% to 2.9% |
| Delaware | 2.2% to 6.6% |
DATA SOURCES: BUSINESS INSIDER, TAX-BRACKETS.ORG. STATES LISTED IN DESCENDING ORDER BASED ON PEAK MARGINAL INCOME TAX RATE.
For example, 10 states have a progressive income tax rate that starts at 1.1% or less. In South Carolina, a single filer can earn up to $2,930 and not owe a cent to the state. Meanwhile, in North Dakota, arguably the friendliest of the taxing states because of its abundant oil and mineral reserves, a single filer or married couple could earn up to $37,949 and $63,399 in respective wage income in 2018 and pay only the lowest marginal state income tax rate of 1.1%.
Other progressive tax states have low peak marginal tax rates. North Dakota tops the list by allowing residents to earn over $416,700 this year and pay just 2.9% to the state. However, Arizona is pretty tax-friendly, too, which is probably why so many pre-retirees and retirees flock there. Single filers with wage income of up to $50,889 will owe just 3.36%, with income of up to $152,667 taxed at only 4.24%. Arizona's peak rate for personal income above this level is a reasonable 4.54%.
These states really hit their residents hard
Of course, the opposite is true for some progressive-income-tax states -- i.e., they may have a high starting point or a nosebleed peak marginal tax rate on the wealthy. As for the latter, no state rings truer than California. Despite starting single filers at just a 1% income tax rate on, residents with earned income above $268,750 will begin paying a double-digit state income tax rate. Make over $1 million, and you'll owe a cool 13.3% to the Golden State.
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As for the starting point, Maine and Minnesota cut their residents no breaks. Maine wallops even low-wage earners with a 5.8% state income tax right out of the gate , while Minnesota hits all earned income under $25,390 in 2018 with a 5.35% tax rate. Then again, Oregon might be the worst state of all for income taxes, with a starting point of 5% (only up to $3,349 for single filers), and a 9% rate kicking in at just $8,450 in earned income in 2018.
In other words, where you live does matter. Choosing a state without an income tax, or one that imposes a reasonably low tax burden on its residents, could be a smart way to make your existing earnings stretch farther.
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