8 States Where You Can Escape Income Tax—And What It Really Costs

2026-01-04 15:51:29

Eight states in the U.S. currently impose no income tax on residents: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. While the prospect of living tax-free sounds appealing, there’s an important catch—these states must fund public services somehow, and they do it through alternative revenue streams.

How Tax-Free States Make Up the Revenue Gap

When states eliminate income tax, they don’t reduce government spending. Instead, they shift the tax burden elsewhere. Each of these eight states has developed its own compensation strategy:

Sales Tax and Consumption Taxes: Tennessee stands out with one of the nation’s highest sales tax rates at 7%, meaning residents pay more on everyday purchases. Nevada relies heavily on tourism and gaming taxes to fill its coffers. New Hampshire compensates with elevated property taxes, as does Texas.

Property and Specific Taxes: Texas and New Hampshire both charge higher property taxes than the national average, directly impacting homeowners. Nevada’s casino and hospitality sectors generate substantial tax revenue, shifting costs to visitors and the tourism industry.

Capital Gains Consideration: Washington presents an interesting case. While it imposes no general income tax on residents, it does tax capital gains exceeding $278,000 on most asset types (excluding real estate) at a 7% rate. This means high-net-worth investors may not get the full tax benefit others enjoy in these states.

The Retirement Income Advantage

One genuine benefit: these eight states do not tax retirement income sources. Your 401(k) withdrawals, IRA distributions, pension payments, and Social Security benefits remain completely untouched by state taxation. For retirees on fixed incomes, this can represent meaningful savings.

However, this state-level advantage has limits.

Federal Taxes Still Apply—No Exception

Regardless of your state’s tax policy, federal income tax obligations remain universal. The IRS will collect taxes on your earnings based on the 2026 federal tax brackets:

2026 Federal Income Tax Brackets:

Tax Rate	Single Filers	Married Filing Jointly	Head of Household
10%	$0–$12,400	$0–$24,800	$0–$17,700
12%	$12,401–$50,400	$24,801–$100,800	$17,701–$67,450
22%	$50,401–$105,700	$100,801–$211,400	$67,451–$105,700
24%	$105,701–$201,775	$211,401–$403,550	$105,701–$201,750
32%	$201,776–$256,225	$403,551–$512,450	$201,751–$256,200
35%	$256,226–$640,600	$512,451–$768,700	$256,201–$640,600
37%	Over $640,600	Over $768,700	Over $640,600

Your location affects only state-level obligations, not your responsibility to the federal government. A resident of Nevada, for example, still files federal returns and pays federal income taxes just like residents of high-tax states.

Making the Right Location Decision

Choosing where to live based solely on income tax rates would be shortsighted. However, for those already considering relocation—particularly retirees with fixed income streams—understanding the state income tax landscape is crucial. The combination of no state income tax on retirement distributions, coupled with knowledge of how each state compensates through alternative taxation, can inform smarter financial planning.

The key is understanding the full tax picture: what you save in state income taxes may be offset by higher property taxes, sales taxes, or other levies in your chosen state. A comprehensive financial review, not just a focus on income tax, should guide your relocation decision.

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