States with the Highest Income Tax Rates contrasted with those with the Lowest Rates
Hawaii, California, and New Jersey, among others, are known for their high marginal income tax rates, with Hawaii at 11%, California's top rate reaching 13.3% for income above certain thresholds, and New Jersey and Washington D.C. at 10.75%.
However, five states - Arizona, Indiana, Iowa, Louisiana, and Pennsylvania - have a flat tax structure, meaning the same rate applies to all income levels. These states have top rates of 3%, 3.07%, 3.5%, and 3.8% respectively.
Interestingly, California, famously known for its high taxes, also has nine different tax brackets, offering a more progressive tax structure.
For those considering retirement, it's essential to consider what kind of breaks are available in a state. Some states offer tax credits, deductions, and incentives for retirees. However, when prioritising where to live in retirement, factors like the location of family, housing needs, and cultural preferences should be prioritised over taxes.
When it comes to income tax, nine states have no individual income tax at all: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. New Hampshire is set to join this list in 2025, as it will eliminate its tax on interest and dividends, effectively becoming a no-income-tax state.
However, states with low or no income tax often make up for it through sales taxes, property taxes, and inheritance taxes. For example, many no-income-tax states rely more heavily on sales taxes and property taxes to fund government services. This means that a low income tax rate does not necessarily translate to a low overall tax burden.
Therefore, when evaluating states based on tax burden, it's important to consider the combined impact of income tax, sales tax, property tax, and other state/local taxes rather than income tax alone. The overall tax environment varies widely, with trade-offs between income tax savings and higher consumption or property taxes depending on the state.
In summary, North Dakota and Arizona have the lowest top income tax rate (among states that levy an income tax) at around 2.5%. Comparing states solely by income tax rates doesn't provide a fair picture of overall taxes. It's crucial to consider the combined impact of all taxes when deciding where to live. A cost of living calculator can help understand how where you live impacts your finances.
While it's important to take into account the combined impact of all taxes when deciding where to live, certain states, such as Arizona, offer advantageous personal-finance opportunities with a low top income tax rate of 3%.
For retirees, considering the available tax credits, deductions, and incentives in a state can play a significant role in personal-finance management. However, factors such as family, housing needs, and cultural preferences should remain the top priorities when deciding where to retire.
