Tag Archives: state

Even Non-Income Tax States Have Taxes

With the increased popularity of working-at-home, you may consider moving to one of the nine states that don’t impose an individual income tax. Before doing so, you should understand how each of these states raises its revenue. And then consider how you can reduce your tax obligation in your current home state.

Here’s some help.

According to Kiplinger and the Tax Foundation, here is how the nine states that collect no individual income taxes collect money from their residents.

Alaska

  • Alaska is one of five states with no sales tax, but local jurisdictions may impose sales taxes, with rates reaching 7.5%. The average is 1.76%.
  • The median property tax rate is $1,182 per $100,000 of assessed home value, slightly above the national average.

Florida

  • The statewide sales tax is 6%, but local jurisdictions can add up to 2.5%, with an average combined rate of 7.08%.
  • The median property tax rate is $830 per $100,000 of assessed home value, a middle-of-the-road figure nationally.

Nevada

  • The state sales tax rate is 6.85% while local jurisdictions can add up to 1.53%. The average combined rate is a lofty 8.23%.
  • The median property tax rate is $533 per $100,000 of assessed home value, one of the lowest in the country.

New Hampshire

  • Besides no state income tax, this tax haven has no state or local sales taxes.
  • Property tax is the main revenue source. The median property tax rate is $2,050 per $100,000 of assessed home value, the third-highest rate in the U.S.

South Dakota

  • The 4.5% state tax may increase to an average combined rate of 6.4%, below the national average.
  • The median property tax rate is $1,219 per $100,000 of assessed home value, above the national average.

Tennessee

  • Tennessee previously had an income tax on dividends and interest, but it disappeared after 2020. The current 7% state sales tax rate may be combined with a 2.75% on sales of single items for an overall maximum rate of 9.55%, the highest in the U.S.
  • The median property tax rate is $636 per $100,000 of assessed home value, below the national average.

Texas

  • The sales tax in the Lone Star state is 6.25%, plus local jurisdictions can add up to 2%, with an average combined rate of 8.19%, which is well above the national average.
  • The median property tax rate is $1,692 per $100,000 of assessed home value, which is a tie for the seventh-highest rate in the country.

Washington

  • Municipalities can increase the 6.5% state levy by 4% for an average combined rate of 9.23%, the fourth-highest in the nation.
  • The median property tax rate is $929 per $100,000 of assessed home value. This is middle of the pack.
  • Unlike the other eight states, Washington has an estate tax, with a $2.193 million exemption (indexed for inflation). Tax rates range from 10% to 20%.

Wyoming

  • The 4% sales tax may be increased by municipalities for a combined rate of 5.33%. This is the eighth-lowest in the U.S.
  • The median property tax rate is $575 per $100,000 of assessed home value, tied for the tenth-lowest in the nation.

Here are some ideas to lower your property and sales tax bills:

Appeal your property’s valuation assessment. You may be able to lower your property tax bill by providing evidence that your home’s assessed value should be lower. Start your appeals process by contacting your county assessor’s office. Some appeals can be done online, while others may require a visit to your assessor’s local office.

Shop during tax-free weekends. Many states feature one or two weekends each year where sales taxes are suspended. These sales tax holidays sometimes correspond to high volume shopping periods, such as back-to-school sales in late summer.

Deduct sales taxes on your Form 1040 tax return. You’re allowed to deduct up to $10,000 of combined property taxes and sales taxes on your tax return, so be sure to look into this deduction if you itemize your Schedule A deductions. The only potential headache if you deduct sales taxes is needing to track and record all sales taxes you’ve paid throughout the year.

Small Business Consultants Beware

Over the past few years, state revenue departments have been getting creative in making new tax laws to capture non-resident income taxes. If you are an individual operating as a sole-proprietor consultant or service provider to customers out of your own state, here is what you need to know.

This could be you

  • You could owe state income taxes to a state you never visited or worked in.
  • Non-resident employees doing the same work you do as a consultant may not have to pay state income taxes while you must.
  • Federal law protects non-residents from state revenue attacks, but only if you sell tangible property (like pencils, watches and other physical property). It generally does not protect those who provide services.
  • Every state can be different. Just because you know your state’s rules, do not assume other states follow the same guidelines. Nor should you assume other state laws are logical or reasonable.

What can you do?

If you are a consultant providing services to out-of-state customers, here are some tips.

  • Research the states rules – Research your customers’ state tax laws for non-resident service businesses. Also review that state’s non-resident employee wage rules. See if they treat them both the same way.
  • Become a temporary employee – If non-resident rules are different for consultants versus employees, consider becoming a part-time employee or temp employee. Adjust your bill rate to allow for the employer paying half of your Social Security and Medicare.
  • Physical presence – If you conduct your work in the out-of-state location, a non-resident tax return is usually due. But this is not always the case.
  • Service or product? – Remember, selling product across state lines is different than providing a service. Nexus laws and tax cases make physical presence required. But here too, there can be exceptions.
  • If in doubt, ask for help – The best advice is to ask for help. This area of tax code is rapidly evolving. There are no national guidelines and states like California and Michigan are very aggressive. Exceptions in state rules make mistakes easy to happen. This can lead to you owing taxes to another state based on your out-of state activities.

Small service businesses cannot readily defend themselves against large state revenue departments so they are becoming victims as one state tries to take another state’s income tax revenue. While you may receive a credit in your home state for taxes paid to another state, it is not always easy to do and penalties are often applied. Your best defense is knowledge.