Scouting out a location for your business? The state where you operate has a major impact on how much state income tax you pay.
Continue reading to identify the states with the lowest and highest taxes.
Your income, not your state, determines the federal income tax you owe. But depending on where you live, federal income tax may not be the only type of income tax you owe.
You may also have to pay state income tax, a type of tax levied by state governments, not the federal government. Most states have a progressive tax system. The more you earn, the more you pay in state income taxes.
Forty-three states impose state income tax. 41 of these impose state income tax on wages. Another two ‚Äî Tennessee and New Hampshire ‚Äî impose the tax on dividends and interest. But the states with the lowest and highest taxes have very different tax rates.
Seven states currently levy no state income tax:
Many more states have top tax rates of under five percent. Some of these use a progressive tax system. Others levy a fixed tax rate at all income levels. Here are the rates for 2019:
Below are the 10 states with the highest state income tax rates in 2018:
Not always. This is because your total tax liability depends on more than federal and state income tax. It also includes property tax, sales tax, and other local taxes.
For example, Texas levies no state income tax, but the statewide average property tax rate is 1.86 percent. This is the sixth-highest property tax rate of any state. Compare this with Louisiana, which has a state income tax rate of anywhere from 2 to 6 percent. But certain parishes pay no more than 0.25 percent in property tax. So you could end up paying more in total taxes in a low-tax state depending on other taxes imposed. You also have to consider any deductions that could reduce the tax you owe.
As a result, you shouldn't decide where to work based on the states with the lowest and highest taxes. But it is one way to gauge the cost of working in a certain state versus another.