States With No Income Tax

Saving Money By Moving To Cheaper States

Let’s say I decided to move to a state with no income tax. Currently there are 7 states according to Wikipedia: Alaska, Florida, Nevada, South Dakota, Texas, Washington (just 10 miles north of me) and Wyoming. There is New Hampshire and Tennessee as well however these states do tax your dividend income. Even though these states don’t tax your personal income such as through employment, some will tax corporate income. I won’t get into all the details of this, you can always look this information up if you are considering a move to one of these states.

Deciding What’s Right For You

I’m writing this more in a response to the commonly suggested advice of “If you want to save money as a doc just move to a state with no state income tax”. I’m going to run the basic numbers here to show how it might benefit/hurt my bottom line. Remember, you are your own CEO. If you are currently employed then you can think of yourself as a business that makes income. When you take your clothes to a dry cleaner then essentially you are deciding that it makes sense for you to hire an employee (the dry cleaner) rather than spending your time to do that work. In this case maybe think of it as you “moving” your business to another state. After all, the current fad is for large corporations to move their headquarters to Ireland, right?

So it’s end of June in 2015. My income is in a W2 format which means my Federal, State, Social Security and Medicare taxes are withheld from my paycheck automatically. In the past I used to be paid in the form of a K1. Think of that as distribution to a partner in a business. No taxes were withheld from my check in the K1 format. I would get a paycheck every 2 weeks, I would set aside approximately 45% of that money and send in estimated quarterly taxes to the gov’t. Upon filing taxes for that calendar year I would either owe or get money back depending on my circumstances.

Back to my W2, so far (the middle of the year) I have had $10,600 withheld from my check and paid on my behalf by my employer to the State of Oregon. This total sum breaks down to about $800 per paycheck which is deposited for me every 2 weeks.

So, here we are with $10,600 that I could have potentially pocketed. Now, I don’t have sales tax in my state and if I moved across the river to the State of Washington I would owe sales tax. However, I’m not really much of a consumer, my purchases are minimal. My main expenses are groceries most of which isn’t taxed in any state and my rent payment is obviously not taxed either. By the end of this calendar year I will likely end up with somewhere around $19,000 of State income taxes paid/owed. If I saved that money and were able to invest it then I could potentially turn that into $420 after adjusting for inflation and paying taxes on investment income.

10 Years of State Income Taxes

If I were to pay these state taxes for the next 10 years then I would lose out on approximately $236,000, $192,000 of which is actual tax payments and $44,000 of which is the potential income I could have had if I invested that money (passive income). What is the “value” of this $236,000, what could I do with this extra amount of money if I had it? Well, I could buy an investment property with it that may net me about $800/mo and in some cases more. I could invest it in index funds and that may create an inflation and tax adjusted income of about $780/mo. I could use a dividend strategy and create an income of about $590/mo without having to worry about my principal. I could purchase a small community clinic, an auto mechanic shop, a taco shop with an employee etc and expect to make anywhere from $600-3,000/mo depending on various factors.

Naturally there are a LOT of assumptions. But remember, you control a lot of these assumptions and opportunities are plentiful. Only you know what you could do with the extra $236,000. In my case it would make a lot of sense to make the move across the river and work in Washington (income earned in Oregon will still be subject to Oregon State income tax even if my primary residence is in WA).

In Summary

If you are considering a move to a tax-free state then share your thoughts. Also, consider the following points:

  • will cost of living be lower or higher once you move?
  • will you spend more because you are no longer able to pursue your cheaper hobbies?
  • will you incur more cost traveling back and forth to visit friends/family?
  • can you find a job that pays similar wages in the new state?

Share your thoughts...