Where Can You Live Tax Free in the U.S.?

While “tax-free living” in the U.S. generally refers to avoiding state income taxes, no location is entirely tax-free. Federal taxes, such as income tax, Social Security, and Medicare contributions, apply nationwide. State and local governments also rely on sales and property taxes, which significantly influence the overall tax burden and cost of living.

States Without State Income Tax

Nine U.S. states do not levy a state income tax on wages and salaries. These states generate revenue through other means, which affects the total tax landscape:

Alaska
Florida
Nevada
New Hampshire
South Dakota
Tennessee
Texas
Washington
Wyoming

Alaska

Alaska has no state income tax and no state sales tax. Local municipalities may impose sales taxes, and property taxes vary by locality. The state largely funds operations through oil and gas revenues and a Permanent Fund Dividend.

Florida

Florida has no state income tax. It relies on sales tax and property taxes for revenue. Florida’s state sales tax rate is 6%, with local sales taxes adding to this, and property taxes are generally higher than in many other states.

Nevada

Nevada has no income tax, benefiting from its tourism and gaming industries. These sectors contribute substantial revenue. Nevada’s state sales tax rate is 6.85%, with local rates increasing this further, while its effective property tax rate is relatively low.

New Hampshire

New Hampshire does not tax earned income, and it has eliminated its tax on interest and dividend income. It has no state sales tax but some of the highest property tax rates in the nation, though local property taxes vary.

South Dakota

South Dakota has no state income tax, nor does it levy corporate income, inheritance, or estate taxes. The state primarily funds services through sales and excise taxes, with a state sales tax rate of 4.2% and local additions. Property taxes are near the national average.

Tennessee

Tennessee operates without a state income tax, relying on a relatively high state sales tax of 7%, which can be further increased by local sales taxes. It maintains a comparatively low effective property tax rate.

Texas

Texas is constitutionally prohibited from having a state income tax. It has a higher sales tax rate, with a state rate of 6.25% and local additions, and notably higher property taxes than many other states. Property taxes form a significant portion of local government revenue.

Washington

Washington state does not levy a general personal income tax. However, it imposes a capital gains tax on certain high earners. The state also has one of the highest combined state and local sales tax rates in the country, often exceeding 9% in some areas, and relies on business and occupation (B&O) taxes.

Wyoming

Wyoming has no individual income tax, corporate income tax, or estate tax. It generates revenue through sales taxes, with a 4% state sales tax, and property taxes, which are among the lowest in the nation. Wyoming also benefits from taxes on its natural resource production.

Understanding Other State and Local Taxes

Even in states without a personal income tax, residents are still subject to various other state and local taxes that contribute to their overall tax burden. These taxes fund essential services like education, infrastructure, and public safety. Understanding these alternative revenue streams is important for accurately assessing the true cost of living in any given state.

Sales tax is a significant component of revenue for many states, especially those without income taxes. This tax is levied on the purchase of goods and services, and its rate can vary considerably by state and locality. While a state might have a base sales tax rate, local jurisdictions can add to this, leading to substantial combined rates. Frequent consumers or those making large purchases may find their tax burden significant, even without an income tax.

Property taxes represent another major source of local government funding, primarily impacting homeowners. These taxes are assessed annually based on the appraised value of real estate. The effective property tax rate varies widely depending on the state, county, and specific municipality. High property taxes can significantly offset the savings from not paying state income tax, particularly in areas with desirable real estate.

Beyond sales and property taxes, states and localities may impose other levies, such as excise taxes. Excise taxes are charged on specific goods or services, often considered non-essential or harmful, like gasoline, tobacco products, and alcoholic beverages. These taxes are typically included in the price of the item and can accumulate for regular consumers. Various fees for licenses, permits, and specific services also contribute to the overall local tax environment, illustrating that the absence of one tax type does not equate to a completely tax-free existence.

Establishing Legal Residency

Establishing legal residency in a new state is crucial for benefiting from its tax laws. For tax purposes, residency is determined by an individual’s “domicile,” their true, fixed, and permanent home. Proving this intent requires demonstrating a clear break from the previous state and a strong connection to the new one.

To establish domicile, individuals should take concrete steps. These often include obtaining a new driver’s license, registering vehicles, and registering to vote in the new state. It is also advisable to open bank accounts, update mailing addresses, and change professional licenses. Stronger ties to the new state strengthen the claim to residency.

Physical presence is another important factor; many states consider an individual a resident if they spend over 183 days within its borders. However, meeting this day count is often insufficient without demonstrating intent to make the new state a permanent home. Tax authorities may scrutinize factors like family residence, primary social and business activities, and location of possessions. Maintaining meticulous records is essential for substantiating a change in legal residency.

International Considerations

While “tax-free living” within the U.S. primarily revolves around state income taxes, moving abroad does not automatically exempt U.S. citizens from federal taxes. The United States taxes its citizens on their worldwide income, regardless of residence. This principle is known as citizenship-based taxation.

Mechanisms exist to reduce or eliminate U.S. tax liability for income earned abroad. The Foreign Earned Income Exclusion (FEIE) allows qualifying U.S. citizens or resident aliens to exclude a certain amount of foreign earned income from federal income tax, provided they meet specific residency or physical presence tests. This exclusion amount is adjusted annually for inflation.

In addition to the FEIE, U.S. citizens living abroad may claim a foreign tax credit for income taxes paid to a foreign country. This credit can offset U.S. tax liability on foreign source income, preventing double taxation. While these provisions can reduce or eliminate U.S. federal income tax for many expatriates, they do not mean living truly “tax-free.” Individuals may still be subject to taxes in their country of residence and retain U.S. tax filing obligations.