Top 3 Best States With No Income Tax for High Net Worth Individuals
If you’re a high net worth individual looking for ways to avoid high taxes, you have probably considered moving to a state with no income tax. This is something your wealth manager can help you work through because the tax laws are constantly changing. For those with over $5 million liquid investable assets, we suggest you request a copy of our 7 secrets book.
STRATEGIES FOR FAMILIES WORTH $5 MILLION TO $500 MILLION
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This article will help you see which states hold the most promise for your next residence free from income taxes.
Table of Contents
- Are Florida and New Hampshire Really Better for Your Financial Well-Being?
- Get Your Customized Wealth Management Analysis
- The List – 9 States With Low Income Tax
- Shaking the Low-Income-Tax States
- Remove Washington from Your List
- Your Top 3 States With No Income Tax
- Other Taxes to Consider
- Ready to Choose the Best State Without An Income Tax?
Are Florida and New Hampshire Really Better for Your Financial Well-Being?
If you are a high net worth family or individual living in a high-income-tax state such as California, New York, New Jersey, or Oregon, you’ve probably given some thought to moving to a state with no income. And if you hadn’t thought of it much before, you will now, with the recent passage of the new tax code.
The new law caps your federal tax deduction for state and local taxes at $10,000. While this doesn’t affect audience insight, it will cost our ultra-high net worth clients a tax bite because they pay far more than $10k in state and local taxes – especially those who live in high taxes state. And you’ll pay even more for the property tax rate if you also own investment real estate properties. (If you’re curious, here are each state’s income tax rates, ranked from highest to lowest).
Is the solution to move to a low-income-tax state? It’s not that simple. Every state collects income tax. So while there are some states without an income tax, that must mean they charge higher taxes somewhere else. The question is – how does all this affect you and your high net worth or ultra-high net worth friends?
If you’re considering a change of residency and want to get an ally on your side, schedule a chat with Pillar Wealth Management CEO and co-founder Hutch Ashoo. When you talk, be sure to mention you’re thinking about a change of residence. We will help you identify your best living experience that will allow you to protect and secure more of your wealth.
To really dive into selecting a new state of residence, you must take a detailed look at each state you might consider moving to. What does each have in its favor, and what counts against it?
Get Your Customized Wealth Management Analysis
There are many considerations when you accumulate enough assets to reach ultra-high net worth status. You want to put extra thought into choosing the best financial advisor for your family, especially if you hope to optimize your portfolio and try taking advantage of the benefits tied to no-income-tax states.
The List – 9 States With Low Income Tax
First, let’s be clear on the list of states. The nine states with low income tax are Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. Two others, Tennessee and New Hampshire which do personal income tax on dividend income and investment income.
• Florida Nevada New Hampshire
• Alaska Texas Wyoming
• South Dakota Tennessee Washington
While that might not be a big deal for most people living in a state that has an income tax, it matters a great deal to most high net worth investors. Unless you are a rare exception among high net worth families and do not earn a good portion of your income through investments, you can probably take Tennessee and New Hampshire off your list, which leaves seven states.
Shaking the Low-Income-Tax States
You can probably be shaking this list down to just a couple of states based on your personal preferences and needs without much effort.
1. Alaska as State with low income Taxes
For instance, living in Alaska isn’t for most people. That’s why hardly anyone lives there. Unless you like the idea of living in extreme cold and darkness during the winter and being bathed in sunlight for 18 hours or more per day in the summer, Alaska probably isn’t for you. But, living in Alaska gives you low income tax, sales tax, property tax, and excise tax. Residents of Alaska receive investment earnings and dividends from corporations.
2. Wyoming as a State with Low Income Tax
Wyoming is a mostly rural, hilly, windy state with pretty remote population centers. It is actually less populated that Alaska. There are no retirement income taxes or personal income taxes, with low sales tax rates and property taxes for residents. The tax burden, including sales, property, income, and excise taxes, makes Wyoming fit on the list of states with low income taxes.
3. South Dakota is on the List
South Dakota is similar in many ways, though not quite as extreme. It gets hit with blizzards and fairly extreme winters. You’ll drive a lot, and you won’t get many non-local visitors. In addition to higher property tax rates, South Dakota, as the home of many large credit card companies, keeps residents from paying income taxes.
If these icons appeal to you – and they do for certain people – then those states would actually be at the top of your list if you’re looking to move to a state with no income tax.
However, since we know most people do not prefer to live in those types of states, let’s consider the remaining four states: Florida, Texas, Washington, and Nevada.
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Remove Washington from Your List
Though Washington has a lot in its favor in terms of scenery, accessibility, cultural diversity, and business opportunities, it has one major point against it that matters particularly for high net worth and ultra-high net worth retirees. Washington has the highest maximum estate tax in the US and only a $2 million sales tax, taking 20% of your property tax if you are in the highest bracket. See all the states with estate or inheritance taxes. With the federal government also taking 40% of your estate beyond the approximate $11 million sales tax, ultra-high net worth individuals in Washington stand to lose over half their net worth upon their deaths!
You can do a few things to minimize your income taxes to federal property taxes, which we discuss in great detail in our book, The Art of Protecting Ultra-High Net Worth Portfolios And Estates: Strategies for Families Worth $25 Million to $500 Million, which you can get here. But when it comes to states, the best solution is to not live in one that charges this type of tax foundation. So Washington is out from the list.
Please talk with us about your situation and why you’re thinking about moving to another state. We can run several residency scenarios based on your personal situation.
Your Top 3 States With No Income Tax
What’s so great about living in Florida, Texas, or Nevada for high net worth individuals? Let’s take a look at seven of the broadest benefits of living in states with no income tax. And to be clear – every state has its own minor differences and privacy rights of taxes that can change at any time. These are general benefits and do not necessarily apply to all these states. Consult your tax accountant or wealth manager for specifics.
1. No Worries about State and Local Tax Income
Living as residents in these states with no income tax, you will probably be able to claim your sales tax as a deduction for your federal taxes. The only caveat to this is if you own a lot of real estate in these states or make some large purchases that incur five or six figures in sales taxes. In those instances, you would lose out on the highest possible federal tax burden. But since no state can offer any tools around that, it’s not a content measurement of where you choose to live.
2. No Property Tax Rates
When you die, the state governments of Florida, Texas, and Nevada won’t take any of your wealth.
3. Social Security and Retirement Income Belong to You
Without an income tax, you will not have to pay the state tax rate for the retirement income. That amounts to huge savings income compared to high tax states, which in some cases take over 10% of your personal income.
4. Retirement Income Not Taxed
Living in states with no income tax also means you will not pay a tax rate on withdrawals from your IRA or 401k accounts. Protecting your wealth by minimizing your state income taxes from these accounts is one of the great challenges of having a high net worth, so it’s a great relief to not have to worry about it at the state level.
5. It Doesn’t Matter Where You Lived Before
In case you’re wondering, even if you lived in a high-income-tax state like New York or Oregon while you were contributing to your IRA and 401k accounts, when you move to a no-income-tax state, you avoid having to pay state taxes on credit cards.
6. No Sales Tax Rates for Small Business
In Florida, the only businesses that pay taxes are C corporations. LLCs, partnerships, sole proprietors, and S corporations pay no sales tax rate. Texas and Nevada do not have as low sales tax rates as Florida, but they’re still much better than the high tax states. Again, check with a tax accountant to get these sorts of specifics. But this is a point in favor that might edge the state up to the top of your list. Here’s an article with more on Florida’s business tax laws.
7. Property Tax Exemption
Another point in Florida’s favor is what they call the property tax exemption. While perhaps not a huge benefit for someone with a high net worth, this exemption lets you remove the first $25,000 of your home’s assessed value from school district property taxes and the first $50,000 from all other types of property taxes.
Florida Might Be the One
More than any other state, this state seems to have gone out of its way to becoming the most tax-friendly state in the nation. Retirees don’t just move there for the sun. They also move there because it saves them a lot of money with interest income. And high net worth retirees will save income even more.
In fact, we were working on a Wealth Management Analysis for an ultra-high net worth family planning to move to Florida. After we finished, we noticed several things that were quite amazing: With the same investment planning, this family would make $150,000 more investment income living in California. Just by switching their residency and making no other changes, they make an extra six figures annually in the state.
As you can see, a change of residence may be one of the easiest ways to improve the performance of your portfolio. And if you think that’s good, look at this one: According to Business Insider, an ultra-high net worth investor making $10 million a year and who owns a $10 million home will pay $1.2 million more in tax burden while living in New York compared to Florida every year! See a full list of Florida’s tax benefits from their state website.
Get Your Customized Wealth Management Analysis
Are you curious about how a change of residency could help you? If you would like more information about states with no income taxes, schedule a chat with CEO and co-founder Hutch Ashoo to start the conversation.
Other Taxes to Consider
Don’t forget – every state has to collect taxes somehow. Texas and Nevada have very high property taxes, and most of these states with no income taxes have high sales taxes. Washington has the third-highest gas tax in the nation, very similar to California’s.
However, what counts is your effective state tax rate. In other words, when you add it all up, what percentage of your income are you paying in state taxes?
For high net worth families with incomes in the top 20% living in one of the states with no income taxes, you will pay an average of 2.6% in state taxes, compared to 7.5% in the other states.
So on average, it’s three times less costly for you and your high net worth friends to live in a state with no income taxes.
Ready to Choose the Best State Without An Income Tax?
Hopefully, this content has given you a good start as you think about the pros and cons of moving to a state without an income tax to choose from.
Remember, you have to consider much more than just the tax season. Weather is a major consideration, but so might be proximity to family and friends, lifestyle, political preferences, recreational opportunities, residents population, estate options, property, and so much more.
There is more involved in deciding where to move than just taxable income. Here’s an article with more on what each no-tax state has in its favor
And, especially if you own a business or have investment income in your current state, moving to save on taxes isn’t so simple. Determining where your actual residence is and whether it matters how you’re generating your income requires additional consideration. We’ll tackle that content in our next article – How to Determine Residency for Tax Purposes.