Millions of American families move from one state to another each year. And, as you can imagine, there are many reasons why you might pull up stakes and relocate to a different state. You might move to start a new job, be closer to relatives, live in a warmer climate, or even – as a sign of the times – escape a coronavirus hotspot.
But no matter why you decide to pack your bags and move across state lines, do your homework first and check out the cost of living in your destination state. You'll want to look at the cost of housing, of course, but make sure you consider the impact of state and local taxes on your bottom line, too. As our State-by-State Guide to Taxes on Middle-Class Families shows, state tax rates for the average American family are literally all over the map — and the difference between living in a high-tax or a low-tax state can be thousands of dollars each year, depending on your family's tax situation.
To help you determine how big of a tax bite each state would take out of your hard-earned cash, we estimated the overall income, sales, and property tax burden in each state for a hypothetical married couple with two children, combined wages of $77,000, and $3,000 of other income. Based on our findings, we put together the following list of the 10 most tax-friendly states for middle-class families (the most-friendly state is listed at the end). If you're taking a job in another state, or relocating your family for other reasons, you'll want to check it out to see if your state taxes are likely to go up or down after the move.
See the final slide for a complete description of our ranking methodology and sources of information.
State Income Tax Range: 2.2% (on taxable income from $2,001 to $5,000) to 6.6% (on taxable income above $60,000)
Average Combined State and Local Sales Tax Rate: No state or local sales tax
Median Property Tax Rate: $562 per $100,000 of assessed home value
Delaware's income tax is relatively high for our hypothetical middle-class family. The state's top income tax rate of 6.6% hits anyone with more than $60,000 of taxable income, which is a comparatively high rate for people in that income range.
However, low sales and property taxes earn Delaware a spot on our list of the most tax-friendly states for middle-class families. Sales taxes can't get any lower than they are in The First State – there's no sales tax in Delaware! So, you can shop 'til you drop in Delaware without paying a single penny of sales tax on your purchases.
When it comes to property taxes, Delaware has the seventh-lowest median property tax rate in the nation. As a result, the tax on a $300,000 home owned by our hypothetical family is estimated to be just $1,686 per year.
State Income Tax Range: None
Average Combined State and Local Sales Tax Rate: 1.76%
Median Property Tax Rate: $1,182 per $100,000 of assessed home value
Your overall state tax burden is certainly going to be low if there's no state income tax. That's why six of the 10 states on this list don't impose an income tax – and Alaska is the first of those states.
However, there's more to the Last Frontier's low tax burden than just the lack of an income tax. Alaska is one of five states with no state sales tax. If you're heading north to Alaska, just remember that local sales taxes – up to 7.5% – might apply. But, according to the Tax Foundation, the statewide local sales tax average is only 1.76%.
Property taxes are middle-of-the-road in Alaska. If our hypothetical couple were to purchase a $300,000 home in the state, their estimated property tax bill would come to about $3,546 per year. That's a little above the U.S. national average.
There's one other thing about living in Alaska that's worth noting: Alaska gives each legal resident who has lived in the state for a full year an annual "Permanent Fund Dividend." The 2020 dividend is $992. (The highest payment ever was $2,072 in 2015.)
8. North Dakota
State Income Tax Range: 1.1% (on taxable income up to $40,125 for singles filers; up to $67,050 for joint filers) to 2.9% (on taxable income over $440,600)
Average Combined State and Local Sales Tax Rate: 6.94%
Median Property Tax Rate: $986 per $100,000 of assessed home value
Even though North Dakota imposes an income tax, its income tax rates are relatively minuscule, especially for mid-level earners. For our rankings, North Dakota's income tax on our hypothetical family is the lowest of any state that imposes an income tax.
Sales taxes in the Peace Garden State are below average, too. The state rate is a modest 5%. Local governments can add as much as 3.5%. However, according to the Tax Foundation, the average combined state and local sales tax rate is 6.94%, which isn't too bad.
While not dirt cheap, property taxes in North Dakota are quite reasonable. The tax on a $300,000 home is estimated to be $2,958 per year. That's only slightly above the national property tax average for a home costing that much.
State Income Tax Range: 2.59% (on taxable income up to $27,272 for single filers; up to $54,544 for joint filers) to 4.5% (on taxable income over $163,632 for single filers; over $327,263 for joint filers)
Average Combined State and Local Sales Tax Rate: 8.4%
Median Property Tax Rate: $617 per $100,000 of assessed home value
Low income taxes are what put the Grand Canyon State on this list. Middle-income families like our hypothetical taxpayers don't pay the state's lowest rate (2.59%), but at 3.34% they don't pay much more.
Arizona residents benefit from low property taxes, too. The median property tax on a $300,000 home in the state is estimated to be only $1,851 per year, which is well below the U.S. average property tax for a home at that price point.
The state's sales tax is higher than average, though. It starts with a 5.6% state sales taxes. However, all 15 counties levy additional taxes, as do many municipalities. As a result, the average combined state and local sales tax rate is 8.4%, which is the 11th-highest in the U.S., according to the Tax Foundation.
State Income Tax Range: 1% (on taxable income up to $8,932 for single filers; up to $17,864 for joint filers) to 13.3% (on taxable income over $1 million for single filers; over $1,198,024 for joint filers)
Average Combined State and Local Sales Tax Rate: 8.68%
Median Property Tax Rate: $729 per $100,000 of assessed home value
Wait, what? California is a tax-friendly state? Yes…for middle-class families. If you're a rich person, California taxes will cut deep into your earnings. But for other people, the Golden State's tax hit isn't really all that bad.
Our hypothetical middle-class family's income tax bill was the third-lowest among states that impose an income tax. Everyone makes a big deal about California's 13.3% income tax rate, which is the highest top rate in the nation, but only a small percentage of Californians pay that rate. In fact, with 10 different tax rates, California has a very progressive income tax system. Our middle-income family, for instance, only fell into the state's 6% tax bracket. That's not too bad.
Although property taxes are sky high in Silicon Valley and certain other parts of the states, property taxes are below average for the state overall. For a $300,000 home in California, the statewide estimated property tax is only $2,187, which is the 16th-lowest amount in the country.
Sales tax is one area where Californians might pay more than residents of other states. The California state sales tax rate is 7.25%, which is the highest state rate in the nation. However, local sales taxes – up to 2.5% – aren't very high. The Tax Foundation calculates the average combined state and local rate to be 8.68%, which is fairly low.
State Income Tax Range: None
Average Combined State and Local Sales Tax Rate: 9.23%
Median Property Tax Rate: $929 per $100,000 of assessed home value
The only reason why Washington makes this list is because it doesn't have an income tax. Without that tax break, the Evergreen State certainly wouldn't be considered one of the most taxpayer-friendly states in the nation.
Sales taxes in Washington are pretty high. The state sales tax rate is 6.5%, which is well above average. Plus, at 9.23%, the Tax Foundation's average combined state and local sales tax rate for Washington is the fourth-highest in the country.
Property taxes in Washington are more modest. For a $300,000 home, the average tax bill in the state will run you about $2,787 per year. That's a middle-of-the-pack amount when compared to other states.
State Income Tax Range: 1% on interest and dividends
Average Combined State and Local Sales Tax Rate: 9.55%
Median Property Tax Rate: $636 per $100,000 of assessed home value
There's no broad-based income tax in the Volunteer State — only interest and dividends are subject to Tennessee's limited income tax. The first $1,250 in taxable income for individuals ($2,500 for joint filers) is also exempt from the 1% tax (for 2020), and it's waived if you're at least 100 years old. Plus, the tax is being phased out at a rate of 1% per year. So, 2020 is the last year the tax will be imposed.
Property taxes in Tennessee are reasonable, too. Our hypothetical middle-class family can expect to pay only about $1,908 per year for a $300,000 home. That's well below the national average.
Tennessee sticks it to you when you're shopping, though. It starts with a 7% state rate (plus 2.75% on part of the price from $1,600 to $3,200 of single items), but then local governments can tack on up to 2.75% more in taxes on each sale. At 9.55%, Tennessee's average combined state and local sales tax rate is the highest in the nation, according to the Tax Foundation. Ouch!
State Income Tax Range: None
Average Combined State and Local Sales Tax Rate: 7.05%
Median Property Tax Rate: $830 per $100,000 of assessed home value
Florida has no income tax. That keeps the overall state and local tax burden down for middle-class families and everyone else. However, other taxes in the Sunshine State are just average when compared to other locations.
For instance, property taxes are right around the national average. For a $300,000 home in Florida, our hypothetical middle-class family's estimated annual property tax bill is $2,490. That's pretty much in the middle when compared to other states.
The state's average combined state and local sales tax rate is middle-of-the-road, too. It's 7.05%, according to the Tax Foundation. That's based on a 6% state tax rate and local rates that can be as high as 2.5%.
State Income Tax Range: None
Average Combined State and Local Sales Tax Rate: 8.23%
Median Property Tax Rate: $533 per $100,000 of assessed home value
Middle-class families in Nevada love the fact that there's no income tax in the state. But that's not the only tax perk for residents of the Silver State.
Nevada also has the fourth-lowest average property tax rates in the country. So, if our hypothetical middle-class family owned a $300,000 home in the state, they would only pay an estimated $1,599 in property taxes each year.
Sales taxes in Nevada aren't so low, though. There's a relatively high 6.85% state sales tax rate. Then, when you add in local taxes, the average combined state and local sales tax rate shoots up to 8.23%, which is the 12th-highest in the country.
State Income Tax Range: None
Average Combined State and Local Sales Tax Rate: 5.34%
Median Property Tax Rate: $575 per $100,000 of assessed home value
Congratulations, Wyoming – you're the most tax-friendly state for middle-class families! One reason why Wyoming earns this distinction is because generous revenues from mineral and energy extraction continue to flow into the state. That allows the Equality State to keep taxes on residents low across the board.
There's no income tax in Wyoming. As with many of the other states on this list, that's the driving force behind the state's favorable ranking. However, what makes Wyoming unique is that it also has both low sales taxes and low property taxes.
The state sales tax rate in Wyoming is a modest 4%. Municipalities can tack on up to 2% more, which isn't that much. As a result, the state's combined state and average local sales tax rate is the third-lowest of all the states with a sales tax, according to the Tax Foundation.
People who move to these parts like to own a lot of land, and low property taxes make that dream affordable. The property tax on our hypothetical middle-class family's $300,000 home in Wyoming would be about $1,725, which is tied the 10th-lowest property tax amount in our rankings.
About our methodology
Our tax maps and related tax content include data from a wide range of sources. To generate our rankings, we created a metric to compare the tax burden in all 50 states and the District of Columbia.
Income tax – Our income tax information comes from each state's tax agency. Income tax forms and instructions were also used. See more about how we calculated the income tax for our hypothetical family below under "Ranking method."
Property tax – The median property tax rate is based on the median property taxes paid and the median home value in each state for 2019 (the most recent year available). The data comes from the U.S. Census Bureau.
Sales tax – State sales tax rates are from each state's tax agency. We also cite the Tax Foundation's figure for average combined sales tax, which is a population-weighted average of state and local sales taxes. In states that let local governments add sales taxes, this gives an estimate of what most people in a given state actually pay, as those rates can vary widely.
The "tax-friendliness" of a state depends on the sum of income, sales and property tax paid by our hypothetical family.
To determine income taxes due, we prepared returns for a married couple with two dependent children, an earned income of $77,000, long-term capital gains of $1,500, qualified dividends of $1,000, and taxable interest of $500. They had $4,500 in state income taxes withheld from their wages. They also paid $3,000 in real estate taxes, paid $2,800 in mortgage interest, and donated $2,300 (cash and property) to charity. Since some states have local income taxes, we domiciled our filers in each state's capital, from Juneau to Cheyenne. We calculated these 2019 returns using software from Credit Karma.
How much they paid in sales taxes was calculated using the IRS' Sales Tax Calculator, which is localized to zip code. To determine those, we used Zillow to determine zip codes with housing inventory close to our sample assessed value.
How much the hypothetical family paid (and deducted on their income tax return) in property taxes was calculated by assuming a residence with $300,000 assessed value and then applying each state's median property tax rate to that amount.
|For more news you can use to help guide your financial life, visit our Insights page.|