Income Tax by State: Which Has the Highest and Lowest Taxes? (2024)

By examining where you live through the lens of tax savings, you can make informed financial decisions, whether you're considering a new home, planning for retirement, or optimizing your tax responsibilities.

Now, let's look at the various types of taxes, starting with what state income taxes are, how they work, and why understanding these can make a difference to your financial well-being.

Types of taxes: A closer look at what you pay

Understanding the different types of taxes you might encounter is essential for savvy financial planning. It's not just one tax, but several, that could influence your budget. Here's a rundown of what you need to know:

What is state income tax?

State income tax is one of the main types of tax that you might pay based on the money you earn. But unlike federal income tax, which is consistent across the U.S., state income tax can vary widely from state to state. Here’s what you should know:

1. Not all states charge income tax: It's true — not every state will take a cut of your wages. In fact, eight states do not collect any state income tax at all. This means that if you live in one of these states, you won't pay state taxes on the money you earn from your job or your business.
2. Rates can vary: For states that do charge income tax, the rate you pay might be a fixed percentage of your income, known as a 'flat rate,' or it could depend on how much you earn, which is called a 'progressive' tax system. Progressive systems have tax brackets, where higher earnings fall into higher tax brackets with higher rates.
3. Definitions of income: What counts as 'taxable income' can differ by state. Most taxable income includes wages from your job, but it can also cover other forms of income, such as money from freelance work, business profits, and sometimes even retirement distributions or unemployment compensation.
4. Deductions and credits: Each state also has its own set of deductions and tax credits that can reduce the amount of income tax you owe. These could relate to charitable contributions, education expenses, or energy-efficient home improvements. Knowing what deductions and credits you're eligible for can help lower your overall tax bill.
5. Filing requirements: Just like with federal taxes, you may have to file a state income tax return each year if you've earned above a certain amount. These filing requirements vary and may depend on your filing status and age.

How do states decide their tax rates?

Budgetary needs drive the tax rates of each state, funding essentials like schools, roads, and public safety. These requirements regularly prompt state governments to review and adjust tax rates to align with their spending goals.

Tax systems differ, with some states applying a flat tax rate to all residents, while others use progressive rates that increase as income rises. The choice between these systems reflects the state's financial strategy and the political environment shaped by public opinion and elected officials.

Economic factors also weigh in; states may lower rates to invigorate growth or increase them during economic downturns. Ultimately, changes in tax rates are a balancing act intended to provide necessary public services while keeping the state attractive for living and business.

When are state taxes due?

Typically, state income tax returns are due at the same time as your federal tax return — April 15th. However, some states may have different deadlines, and it's worth checking the specifics for where you live, especially in years where the date might be pushed due to holidays or weekends.

State income tax changes for 2023

Each year can bring changes to state tax rates and rules. In 2023, some states might increase or decrease their tax rates, adjust the income brackets, or change tax credits and deductions. You can stay updated with the latest changes by consulting your state's Department of Revenue—or equivalent tax authority—for the latest information.

Capital gains taxes

Capital gains tax is what you pay on the profit from selling assets, like stocks or property. States may have different rates for capital gains, separate from regular income tax. Some states align with federal capital gains tax rules, while others set their own rates or exemptions.

Corporate income taxes

Not just individual taxpayers, but businesses, too, pay income tax on their earnings. Corporate income tax rates differ from state to state and can have a significant effect on where businesses choose to set up shop. These taxes play a part in the overall ecosystem of a state's economy.

States with the highest and lowest income tax rates

In the U.S., personal income tax rates are a patchwork of policies that reflect each state's economic and fiscal priorities. These rates can directly influence residents' financial planning and well-being. Let’s take a look at the states with the steepest income tax rates.

Top 10 highest income tax rates by state for 2023:

1. California: 13.3% for individuals earning more than $1 million. A 1% surcharge for mental health services applies to this income bracket.
2. Hawaii: 11% for singles earning over $200,000 and couples earning over $400,000.
3. New York: 10.9% applies to individuals earning more than $1,077,550 and couples earning more than $2,155,350.
4. New Jersey: 10.75% on income over $5 million.
5. Oregon: 9.9% for single filers earning over $125,000 or joint filers over $250,000.
6. Minnesota: 9.85% for individuals earning more than $164,400 and couples more than $273,470.
7. District of Columbia: 10.75% on income over $1 million.
8. Vermont: 8.75% for individual incomes over $204,000 and joint incomes over $243,750.
9. Iowa: 8.53% for individuals earning more than $75,420.
10. Wisconsin: 7.65% on individual incomes exceeding $263,480 and joint filers above $351,310.

While these rates represent the maximum you might pay based on your earning bracket, the effective rate, after accounting for various deductions and credits, could ultimately be lower.

Now, on to the states with minimal or no income tax, which could mean more money in your pocket after tax season.

States with the lowest personal income tax rates

For those seeking a lighter tax touch, certain states offer low — or even no — personal income tax, making them attractive destinations for individuals and families looking to maximize their earnings. Here's a look at the states where residents enjoy the lowest personal income tax rates:

States with no personal income tax:

Some states have decided to do away with personal income tax altogether, giving residents the advantage of keeping more of their earned income. These include:

1. Alaska
2. Florida
3. Nevada
4. South Dakota
5. Tennessee
6. Texas
7. Washington
8. Wyoming

New Hampshire does not have an earned income tax, but it does tax interest and dividend income.

Beyond the rates:

While the absence of state income tax can be appealing, it is important to consider the overall tax burden, as states may have higher property or sales taxes to offset the lack of income tax revenue. Additionally, each state has different costs of living and public services that might balance out the tax savings.

Being in a state with low or no income tax can be a major financial advantage, but it's important to look at the full picture when deciding where you might save the most money. Remember to examine all tax implications, including sales, property, and other state-specific taxes and fees.

States with the highest and lowest property tax rates

A significant part of your tax responsibility involves property taxes, which are largely determined at the local level but can vary widely by state. Here’s what homeowners should know about the states with the heftiest and most modest property tax rates:

States with the highest property tax rates:

These states are known for having high property tax rates, which can significantly add to homeownership costs:

1. New Jersey: With rates that can surpass 2.20%, it's the nation's leader in property taxes.
2. Illinois: The average property tax rate here is around 2.10%.
3. New Hampshire: Homeowners face an average rate of 1.93%, despite not having a general state income tax.
4. Connecticut: Property tax rates here are commonly above 1.79%.
5. Vermont: With an average rate of 1.83%, Vermont's scenic beauty comes with significant property taxes.
6. Texas: Despite having no state income tax, Texas has property tax rates around 1.69%.
7. Nebraska: Known for rates hovering around 1.65%.
8. Wisconsin: Averages at 1.61% for property taxes.
9. Ohio: Property tax rates in Ohio typically stand at 1.59%.
10. Iowa: Completes the top ten with an average property tax rate of 1.53%.

States with the lowest property tax rates:

On the other end of the spectrum, these states offer more affordable property tax rates:

1. Hawaii: Offers the most affordable rates in the country, typically below 0.30%.
2. Alabama: Another state with favorably low rates, around 0.40%.
3. Colorado: Homeowners here enjoy rates around 0.51%.
4. Louisiana: Rates in Louisiana generally fall below 0.55%.
5. District of Columbia: Not a state, but D.C. offers rates as low as 0.55% for its homeowners.
6. South Carolina: Comes in with an average rate of 0.57%.
7. West Virginia: Property tax rates around 0.59%.
8. Nevada: The Silver State has property taxes averaging 0.60%.
9. Wyoming: Another state with no income tax, and property tax rates at a competitive 0.61%.
10. Utah: Features relatively low property tax rates at around 0.62%.

Consider the big picture:

Property tax rates are critical to consider when buying a home or planning your finances. Yet, the cost is just one factor. Assessing the quality of local schools, public services, and community infrastructure is also important. While low rates may be enticing, the benefits of well-funded public services in areas with higher rates can contribute significantly to property values and quality of life.

States with the highest and lowest sales taxes

Sales tax is the percentage of tax added to the sale of most goods and services, and it can have a big impact on your day-to-day expenses. Individual states can have differing sales tax rates when combined with local taxes. So, the amount you pay at checkout can vary a lot between communities within the same state. Let’s look at which states have the highest and lowest combined state and local sales tax rates:

States with the highest combined sales taxes:

These ten states have the heftiest average sales tax rates:

1. Tennessee: 9.55%
2. Louisiana: 9.52%
3. Arkansas: 9.47%
4. Washington: 9.23%
5. Alabama: 9.24%
6. Oklahoma: 8.95%
7. Illinois: 8.82%
8. Kansas: 8.68%
9. California: 8.66%
10. Texas: 8.25%

States with the lowest combined sales taxes:

Looking for the least amount of sales tax on your purchases? These states offer the lowest combined rates:

1. Delaware: 0%
2. Montana: 0%
3. New Hampshire: 0%
4. Oregon: 0%
5. Alaska: While there's technically no state-level sales tax, some localities may impose their own taxes, averaging a low combined rate of 1.76%.
6. Hawaii: 4.44%
7. Wyoming: 5.34%
8. Wisconsin: 5.43%
9. Maine: 5.50%
10. Virginia: 5.65%

The impact of sales taxes on your wallet

While sales taxes often go overlooked in budgeting, they can accumulate significantly over time. States with no or low sales tax rates can be more affordable for consumers, but just as with property and income taxes, it's essential to look at the overall tax landscape to understand the true cost of living in a given state. Keep in mind that states with no or lower sales tax may have higher rates in other forms of tax to make up the difference.

Considering the full picture of taxes, from income to sales to property, provides the clearest view of how your state of residence affects your financial wellbeing.

Understanding your state's tax burden

Feeling the weight of your taxes? Think of it as the tax 'backpack' you carry: in some states, it’s heavier due to a variety of taxes adding up, while in others, it’s lighter, letting you stroll through the year with a bit more ease. This 'backpack' isn't just about what you shell out on April 15th. It's the total amount you pay in state and local taxes, including sales, income, property, and excise taxes, weighed against your earnings.

How heavy is your state's tax backpack?

When we measure all these taxes together, experts at WalletHub term it the "tax burden." It's a clear way to see how much of your hard-earned money sticks with you after taxes. Here's a look at states where residents’ wallets feel the pinch of taxes the most, and where they can breathe a bit easier.

States with the heaviest tax burden:

In these states, a mix of higher rates across various taxes means residents tend to see more of their income going to taxes:

• New York: 12.47%
• Hawaii: 2.31%
• Maine: 11.14%
• Vermont: 10.28%
• Connecticut: 9.83%
• New Jersey: 9.76%
• Maryland: 9.44%
• Minnesota: 9.41%
• Illinois: 9.38%
• Iowa: 9.15%

States with the lightest tax burden:

If you're looking for a lighter tax backpack, these states stand out for their low overall tax burden:

• Alaska: 5.06%
• Delaware: 6.12%
• New Hampshire: 6.14%
• Tennessee: 6.22%
• Florida: 6.33%
• Wyoming: 6.42%
• South Dakota: 6.69%
• Montana: 6.93%
• Missouri: 7.11%
• Oklahoma: 7.12%

While tax rates might not make or break your decision to live in a particular state, they are worth considering, especially as you plan for retirement or evaluate your overall financial health. A lighter tax burden could mean more freedom to enjoy your earnings now and more security to save for those golden years.

Comparing 2023 state taxes

Making sense of the tax landscape means comparing more than just one type of tax rate. From income to property to sales taxes — and all the other taxes in between — each state crafts a unique tax profile that can affect your wallet in different ways. To help you get a clearer view of where each state stands, we've compiled a chart using information provided by the Tax Foundation that breaks down several key tax rates across all 50 states.

Please note, the following state tax rates are provided as a guide and can vary based on a number of factors, including your specific location within a state, and applicable deductions or exemptions you may qualify for.