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5 most tax-friendly states to live in

During tax season, it seems as if everyone thinks the grass is greener one (or in some instances, two) states over. Wonder whether your own envy is justified? Luckily, the Tax Foundation, a nonpartisan tax research group based in Washington, D.C., crunched some numbers to determine which states are the most generous with residents.

Unlike other "best of" surveys, the Tax Foundation takes a number of criteria into consideration, including state and local income taxes, property taxes and local sales taxes. Other overviews, such as those based on the Census, may rely solely on state income tax revenue (hence the minor difference in ranking).

Below are the five most tax-friendly states, according to the Tax Foundation's results. Worth noting is that the results were calculated based on information made available from the Tax Foundation for 2008, the last tax year for which state income tax data is completely available. Any recent changes, where significant, have been noted.

ALSO SEE: 5 least friendly tax states to live in!




1. Alaska. Alaska doesn't have a state income tax, state sales tax or a state inheritance tax. As tax burdens go, it's the best state to live in.

It hasn't always been that way. In 1978, Alaska was ranked 49th, making it one of the most tax-heavy states in the country. Residents can thank federal funds and big oil for the dramatic reversal.Three years ago, federal funding accounted for almost one-fifth of Alaska's revenue. Per capita, Alaska receives more federal funding than any other state in the country, an honor held since 1999. That means much of Alaska's infrastructure is paid for by federal funds, not state funds. If you don't have much in the way of expenses, you don't need much in the way of additional revenue. As a result, the tax burden stays pretty low.

But wait! The Last Frontier's tax perks get even better: The completion of the federally-funded Trans-Alaska pipeline and the establishment of Alaska as an energy center for gas and oil has proven to be a boon for residents. After the pipeline was completed, the state created a program called the Alaska Permanent Fund, that invests and distributes royalties from oil companies doing business in Alaska to residents. In 2008, the check was a record $3,269 per eligible resident. Eligible residents are those (including children) who have lived in Alaska for a full calendar year.

2. Nevada. Nevada doesn't impose a personal (or corporate) income tax. The state's estate tax is based on the federal estate tax (like many states, so there's nothing payable for this year), property taxes are reasonable, and sales taxes are also low. So how does this state manage to meet its expenses? Nevada's business-tax friendly climate continues to attract business (and thus, revenue) to the state. On top of that, it has the added advantage of off-loading some of its tax burden onto tourists through sales and entertainment-related taxes. Apparently, it really is true that what happens in Vegas, stays in Vegas -- especially when it comes to dollars (the Strip in Vegas has been tagged as one of the top tourist destinations in the U.S.).

3. Wyoming. Like Nevada, Wyoming doesn't impose any personal income taxes. State sales taxes ring in at well below the national average, saving taxpayers a cut at the cash register. The Cowboy State is probably best known for its beautiful scenery. Surprisingly, the reasonably-priced real estate is only taxed at a fraction of the actual value -- even better, residents are legally protected from counties and municipalities increasing property tax rates. The state also allows for considerable relief from property taxes in many circumstances. There is no separate inheritance tax and, as in Nevada, any estate tax is based on the federal estate tax.

Despite low taxes, the state doesn't appear to skimp on services: Wyoming has the distinction of being the first to have a county public library system (the Laramie County Public Library System, organized in August 1886). It may help that there are few taxpayers who require services; at last count, the entire state population was 532,668 -- less than the population of Boston, Denver or Seattle.

4. Florida. Sunshine and low tax rates have helped Florida become one of the fastest-growing states in the country. Florida imposes no personal income tax and no inheritance tax. Property taxes are collected at the state and local levels with rates per person landing it near the middle of all states when it comes to overall property tax paid out. As the state tries to keep taxes low for residents in a tight economy, it is exploring alternative ways of raking in revenue -- such as a proposed gambling deal with the Seminole tribe, which is expected to provide the state with $412 million. Florida is also grabbing at federal stimulus dollars (which they originally proposed to reject) to keep the budget afloat -- subsidies like the proposed $880 million Medicaid grant have helped Florida lawmakers avoid expensive tax hikes.

5. New Hampshire. The Granite State is known for its fierce independent streak, and, when it comes to taxes, it's no different. New Hampshire's personal income tax system is simple and inexpensive: It's a flat tax with no individual brackets. Income tax applies only to unearned income like dividends and interest. That makes the average income tax paid in New Hampshire an astonishing $89 per person. New Hampshire also imposes no sales tax on its residents. It makes up the difference in its budget by collecting a relatively high level of state and local property taxes. Despite coming in third with respect to property taxes paid nationally, the overall burden still remains low.



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