What Is the Best State to Live in for Tax Purposes?

Determining the best state for tax purposes is a personal calculation that depends on your financial circumstances, including income, spending habits, and goals. A state that benefits a high-income professional might not be ideal for a retiree. This analysis moves beyond income tax rates to explore the effects of property, sales, and estate taxes to help you find a state tax system that aligns with your financial profile.

States Without a State Income Tax

A common starting point for identifying a tax-friendly state is to look for those without a personal income tax. As of 2025, several states do not levy a general income tax.

• Alaska
• Florida
• Nevada
• New Hampshire
• South Dakota
• Tennessee
• Texas
• Wyoming

Washington is also in this group, as it does not tax regular income but does impose a tax on certain long-term capital gains above a specific threshold. New Hampshire fully repealed its tax on interest and dividend income effective January 1, 2025, making it more attractive for investors and retirees.

The absence of a state income tax is a financial advantage for those with high earnings. However, the “no income tax” label does not mean “no tax.” State and local governments must generate revenue for public services and compensate with higher sales or property taxes. For example, Texas has high effective property tax rates, while Tennessee has a high combined sales tax rate. The appeal of zero income tax is only one component of the larger financial picture.

Evaluating Total Tax Burden

A measure of a state’s tax friendliness requires looking at the “total tax burden,” which is the cumulative impact of all major state and local taxes paid by residents as a percentage of their income. This view includes property, sales, and estate or inheritance taxes.

Property Taxes

For most homeowners, property taxes represent a recurring expense. These taxes are levied by local governments and are based on the assessed value of your property and the local tax rate, often expressed as a “mill rate.” One mill is equivalent to $1 of tax for every $1,000 of assessed value.

The effective property tax rate—what residents pay as a percentage of their home’s market value—varies dramatically. States like New Jersey have some of the highest effective rates, often exceeding 2%, while states such as Hawaii and Alabama have rates well below 1%. This disparity means a home of the same value could have a much higher tax bill in one state compared to another.

Sales and Use Taxes

Sales taxes affect the cost of everyday goods and are composed of a statewide rate plus additional local taxes. This results in a wide range of combined rates even within the same state. As of 2025, states like Louisiana and Tennessee have some of the highest combined sales tax rates, while Delaware, Montana, New Hampshire, and Oregon have no statewide sales tax.

The impact of sales tax depends on consumption patterns. States often provide exemptions for necessities like groceries and prescription medications, but the specifics vary. This means the effective sales tax rate you pay can be lower than the posted rate depending on what you buy. A “use tax” is owed on taxable items purchased from an out-of-state seller, such as online, when no sales tax was collected at the time of purchase.

Estate and Inheritance Taxes

For individuals concerned with wealth transfer, state-level estate and inheritance taxes are a planning consideration. An estate tax is paid by the deceased person’s estate before assets are distributed, while an inheritance tax is paid by the beneficiaries. The federal government levies an estate tax, but only on estates exceeding a very high value ($13.99 million for an individual in 2025).

As of 2025, twelve states and the District of Columbia impose their own estate tax, often with much lower exemption thresholds than the federal government. Some states begin taxing estates valued at $1 million or $2 million, meaning an estate not subject to federal tax could still face a state tax liability.

Five states levy an inheritance tax:

• Kentucky
• Maryland
• Nebraska
• New Jersey
• Pennsylvania

Maryland is unique because it imposes both an estate and an inheritance tax. Inheritance tax rates often depend on the relationship of the heir to the deceased; surviving spouses are exempt, while more distant relatives may face higher rates. Iowa fully repealed its inheritance tax for deaths occurring on or after January 1, 2025.

Tax Considerations for Different Lifestyles

A state’s tax structure can have different implications for a high-income professional, a retiree, or a young family. Analyzing the interplay between income, property, and sales taxes through these lenses provides a more practical understanding of a state’s tax climate.

For High-Income Earners

For high-income earners, the focus is often on minimizing income tax. States with no personal income tax, such as Florida, Texas, and Nevada, are naturally appealing. The savings from avoiding a state income tax, which can have top marginal rates exceeding 10% in states like California and New York, allow for greater investment and wealth accumulation.

The treatment of investment income is also a factor. Most states tax capital gains at the same rate as ordinary income. States without a personal income tax do not tax capital gains either, providing an advantage for active investors. This benefit must be weighed against potentially higher property and sales taxes, which could partially offset the income tax savings for those with expensive property and high consumption habits.

For Retirees

Retirees have unique tax planning needs, as their income often comes from multiple sources. The most important considerations are the state’s treatment of Social Security benefits, pension income, and distributions from retirement accounts like 401(k)s and IRAs.

As of 2025, the majority of states do not tax Social Security benefits. Some states that do have an income tax are surprisingly retiree-friendly because they offer generous exemptions for other forms of retirement income. For example, Illinois, Mississippi, and Pennsylvania exempt most 401(k), IRA, and pension income from state taxes. This can make them more favorable for some retirees than a no-income-tax state with very high property taxes.

For Families

For families, property taxes are a primary concern, as they are a household expense and the funding source for local public schools. A state with high property taxes may offer well-funded schools, creating a trade-off that many families must evaluate. Sales taxes also have a significant impact on families due to the constant need to purchase goods. A state with a high sales tax rate, especially one that taxes necessities, can add a strain to a family’s budget.

Some states offer specific tax provisions aimed at easing the financial burden on families. These can include child tax credits or deductions for dependent care expenses that directly reduce a family’s state tax liability. These benefits can sometimes influence a family’s overall tax burden, making a state with a moderate income tax more appealing than one with no income tax but fewer family-oriented tax benefits.

Establishing Domicile for Tax Purposes

Choosing a new state for its tax benefits is only the first step; you must also legally establish it as your new home, or “domicile.” A domicile is the one place you consider your true, permanent home. States you are leaving, particularly those with high income taxes, may challenge your move to ensure it is legitimate.

To successfully change your domicile, you must demonstrate a clear intent to abandon your old home and establish a new one. This is proven through a series of concrete actions.

• Obtain a new driver’s license
• Register your vehicles in the new state
• Register to vote in the new state
• Update your address with the U.S. Postal Service, banks, and the IRS

Physical presence is another factor. Many states have a “183-day rule,” which creates a presumption of residency for tax purposes if you spend more than half the year in that state. To defend against a residency audit from your former state, it is important to keep detailed records, such as travel calendars and receipts, to prove you were not physically present for more than 183 days.

Simply being absent from your former state is not enough; you must actively establish ties to the new one. This includes moving personal belongings, joining local community groups, and establishing relationships with local professionals like doctors and accountants. The more connections you can demonstrate to your new state, the stronger your case for having changed your domicile.