Moving to a State With No Income Tax: Potential Savings Await

Each year during tax season, you probably just grin and bear it. Well, bear it, at least. You likely aren’t grinning because, when it comes to federal income taxes, the numbers don’t necessarily add up to anything fair. When you add state income taxes on top of that, you might be ready to declare that you can’t take it anymore. But there’s something you can do: Choose to live in a state with no income tax.

When Enough Is Enough

Kiplinger reveals that the top 10 percent of earners in the 2012 tax year (those with an AGI between $125,000 and $175,000) paid 70.2 percent of all federal taxes. However, this group earned only 47.9 percent of all income. This demonstrates how the current tax system treats people differently and can create a disincentive to work: The more you earn, the less income you get to keep. And these figures don’t even consider state income taxes.

From One State to Another

Not paying state income taxes can increase your amount of kept income by more than you might think. Seven states have no income tax, while two only tax on interest and dividends income. These tax differences among the states result in a tremendous amount of interstate migration each year. Depending on your willingness and ability to move, you can keep more of your income, and add a significant amount to your retirement savings.

On Save Taxes by Moving, economist Art Laffer explains how to calculate your potential savings if you moved from a state of high income taxes to a state with no state income taxes. Here are a few examples:

Example 1: Sacramento, California, to Austin, Texas

Let’s say you want to move from California to Texas, the most popular destination for those who leave the Golden State (approximately 679,800 native Californians now call Texas home).

To determine your potential savings, type your particulars into the calculator. For example, if you’re 35, married and filing jointly, have three dependents, and make $90,000 a year, you’d save $1,624 per year by moving. If you then invested that money each year until retiring at age 67, assuming a 6 percent interest rate (which is doable), you’d add an extra $147,603 to your net worth.

Example 2: Portland, Oregon, to Vancouver, Washington

Let’s try another calculation, this time with Portland, Oregon, and Vancouver, Washington—one metro area but with completely different tax systems. Oregon’s income tax for people who make $125,001 a year or more is 9.9 percent (9 percent if between $8,250 and $125,000) compared with Washington’s, which is 0 percent.

So let’s say you’re 40, single, have no dependents, and earn $65,000 a year. By moving just across the Columbia River from Portland to Vancouver, you would save $4,894 per year. If you then invested that money each year until retiring at 67, assuming a 6 percent interest rate, you’d add an extra $311,771 to your net worth. That’s a healthy addition to your retirement nest egg.

Example 3: West Memphis, Arkansas, to Memphis, Tennessee

This example might surprise you, because it entails a move of only about eight miles: West Memphis, Arkansas, to Memphis, Tennessee.

Let’s say you’re 30, married and filing jointly, have one dependent, and earn $60,000 a year. By moving just across the state line, you would save $3,009 per year. If you then invested that money each year until retiring at 67, assuming a 6 percent interest rate, you’d add an extra $382,886 to your net worth.

Sometimes, you don’t have to move far to witness additional savings. Try it for yourself by plugging your data into the Save Taxes by Moving calculator. As you can see, moving to a state with no income tax can make a big difference in your financial life.

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