Which States Have No Income Tax on Investments?
Which States Have No Income Tax on Investments?
Nine states have completely eliminated income tax on wages, investment income, and capital gains. This feature has made them magnets for wealth migration, particularly from the Northeast and California. An investor earning $100,000 in annual investment income saves $10,000–$15,000 per year in state taxes by relocating from a high-tax state to a no-income-tax state. Over a career, this compounds into millions of dollars in additional wealth.
Quick definition: Nine U.S. states (Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming, and New Hampshire) impose zero income tax on any form of income, including wages, interest, dividends, and capital gains. This shelter applies to residents; out-of-state earners still owe tax to their home state.
Key takeaways
- Nine states have zero income tax: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming, and New Hampshire (though New Hampshire and Tennessee exempt investment income specifically)
- No-income-tax states fund government through sales tax, property tax, and corporate tax, creating different fiscal trade-offs
- Relocating to a no-income-tax state saves 5–13% annually on investment income, depending on your prior state
- Residency is determined by intent and physical presence, not just buying property; establishing domicile requires severing ties to prior states
- Remote workers and retirees are most likely to benefit from no-income-tax state migration
The nine states with no income tax
Alaska: Alaska has no state income tax, and residents benefit from state Permanent Fund dividends (paid from oil revenues), averaging $1,000–$2,000 per year. Alaska is geographically remote and has high costs of living, limiting appeal for most retirees and investors. However, for those already in Alaska or committed to relocation, the tax advantage is pure.
Florida: The most popular no-income-tax destination, Florida attracts retirees and wealthy individuals from the Northeast. No state income tax on any form of income. Florida funds government through sales tax (7–7.5% base rate), corporate tax, and property tax (typically 0.4–1.2% of home value). Miami, Tampa, and Jacksonville are major financial hubs.
Nevada: Famous for Las Vegas and Reno, Nevada has no state income tax and relatively low property taxes. Home prices have surged due to no-income-tax migration from California. Nevada's economy is heavily dependent on tourism and gaming, making it volatile during recessions.
South Dakota: South Dakota has no income tax, low sales tax (4.2% base), and no corporate income tax on most pass-through entities. It is known for having favorable banking and trust laws, attracting some trust and wealth management activity. Cost of living is modest outside of Sioux Falls.
Tennessee: Tennessee eliminated its Hall Income Tax (tax on dividends and interest) in 2021, but does not tax wages. It funds government through sales tax (9.55% statewide, among the highest in the nation). For investors in taxable accounts (where the majority of returns are dividends and capital gains), Tennessee is effectively no-income-tax. However, the high sales tax means retirees with high spending pay more in total taxes.
Texas: No state income tax and moderate property tax (1.8% average), making Texas popular with businesses and wealth migration from the Northeast and California. Major cities (Houston, Dallas, Austin) have become startup and financial hubs. Texas funds government through business tax and property tax.
Washington: No state income tax, but Washington has a high capital gains tax (7% on long-term gains over $250,000 since 2022), narrowing the advantage for high-income investors with large taxable accounts. Washington has a sales tax of 10.25% statewide, among the highest in the nation. Seattle is a major tech hub, offsetting the capital gains tax for tech workers with significant W-2 income.
Wyoming: Wyoming has no state income tax, no corporate income tax, and no capital gains tax. Property taxes are low (around 0.6% on home value), and it offers favorable trust and LLC laws. Wyoming is sparsely populated and rural, limiting appeal for those seeking urban amenities.
New Hampshire: New Hampshire has no state income tax on wages or capital gains (as of the mid-2020s), and recently exempted investment income. It does tax interest and dividends at a rate of 5% (on interest income and short-term gains), but this is moving toward full exemption. Property tax is high (1.2% of home value) to compensate for lost revenue. New Hampshire is popular with retirees migrating from the Northeast.
Tax comparison: High-tax vs. no-income-tax states
| Scenario | California | Texas | Difference |
|---|---|---|---|
| $250,000 long-term capital gain | $250,000 × 15% (federal) + $250,000 × 13.3% (state) = $70,750 in taxes | $250,000 × 15% (federal) = $37,500 in taxes | Texas saves $33,250 (44% less tax) |
| $100,000 dividend income (taxable account) | $100,000 × 15% (federal) + $100,000 × 13.3% (state) = $28,300 in taxes | $100,000 × 15% (federal) = $15,000 in taxes | Texas saves $13,300 (47% less tax) |
| $1,000,000 portfolio with 5% annual return ($50,000/year gains) realized | $50,000 × 28.3% (federal + state) = $14,150/year; over 20 years = $283,000 | $50,000 × 15% (federal) = $7,500/year; over 20 years = $150,000 | Texas investor saves $133,000 before compounding |
Sales tax and property tax trade-offs
No-income-tax states must fund government another way. Most rely on higher sales and property taxes:
Sales tax:
- Florida: 7–7.5%
- Texas: 8.25% (varies by city)
- Nevada: 8.375%
- Washington: 10.25%
- Tennessee: 9.55%
For investors realizing large capital gains but spending modestly, the sales tax increase is negligible. A high-income investor realizing $500,000 in annual gains but spending only $80,000 annually saves <$500 in additional sales tax while gaining <$66,500 in state income tax savings. However, for a retiree with high annual spending, the sales tax trade-off is material.
Property tax:
- Texas: ~1.8% (one of the highest in the nation)
- Florida: 0.4–1.2% (varies by county)
- Nevada: ~0.6%
- South Dakota: ~0.8%
- Wyoming: ~0.6%
For an investor buying a $1 million home, the property tax difference between California (1.25%, due to Prop 13 caps, but closer to 0.76% effectively) and Texas (1.8%) is roughly $10,400 per year, or $260,000 over 25 years. However, this must be weighed against the state income tax savings, which often exceed $200,000 over the same period for someone realizing significant gains annually.
How residency is established and challenged
Moving to a no-income-tax state requires establishing domicile—legal residency determined by intent, not just property ownership. States closely scrutinize residency changes to prevent tax avoidance, particularly when high-income earners claim to relocate.
Establishing domicile typically requires:
- Establishing a permanent home in the new state (owning or leasing a primary residence, not just owning investment property).
- Obtaining a driver's license and registering vehicles in the new state.
- Changing voter registration to the new state.
- Updating financial institution records to reflect the new address.
- Severing ties to the prior state: selling a home, abandoning club memberships, closing bank accounts, changing your primary place of business.
- Spending the majority of the year in the new state (more than 183 days annually is a common threshold, though not a hard rule).
States also examine:
- Where your spouse resides and where children attend school.
- Your employment location and whether your business is in the new or old state.
- Presence of family property, rental properties, or other assets in the old state.
- Professional licenses and malpractice insurance policies (for doctors, lawyers).
- Duration of stay and continuity of residence.
An investor who buys a home in Florida but spends winters there and summers in Connecticut, maintains a Connecticut business, and keeps Connecticut voter registration will be assessed as a Connecticut resident by Connecticut tax authorities (who will demand income tax) and a Florida resident by Florida (who will collect information). This triggers double taxation and expensive audits.
Residency disputes: Real consequences
A famous residency dispute: Boris Johnson (former UK Prime Minister) vs. California. Johnson claimed California residency but spent significant time in the UK and maintained his UK domicile. California asserted Johnson owed state income tax. The dispute was resolved through negotiation, but illustrates how aggressive states pursue high-income earners.
Another example: High-earning tech workers relocating from California to Texas during the COVID-19 pandemic. Some California residents moved to Texas, but California authorities asserted they were still California residents if they maintained homes, spent more than 183 days in California, or worked for California-based employers. Disputes and back-tax bills followed.
The capital gains tax in Washington
Washington stands apart: it has no income tax, but enacted a 7% capital gains tax on long-term gains exceeding $250,000 in a single year (effective 2022). For investors realizing large gains, this narrows the advantage versus moderate-tax states.
A $1,000,000 long-term capital gain in Washington triggers:
- Federal tax: $150,000 (15%)
- Washington capital gains tax: $52,500 (7% on the portion over $250,000)
- Total: $202,500, or 20.25%
Compare to California (28.3%) or New York (25+%), and Washington still saves. But compared to Wyoming or South Dakota (15% federal only), Washington is 5.25 percentage points more expensive.
Making the move: Financial and logistical considerations
Costs of relocation:
- Real estate transaction costs (buying a home, selling a prior home): 5–10% of home value
- Moving expenses: $5,000–$20,000
- Legal and accounting fees to document domicile and file residency affidavits: $2,000–$5,000
- Time and disruption: immeasurable
Break-even analysis: For a high-income investor realizing $300,000 in annual gains, moving from California to Texas saves $39,900 per year in state taxes (California 13.3% vs. Texas 0%). If the move costs $40,000, you break even in 12 months. For retirees and remote workers with a 20+ year horizon, the math is compelling.
For a moderate-income earner realizing only $50,000 in gains annually, the savings are $6,650 per year. A $40,000 move cost takes 6 years to recoup. Less compelling, but still positive if you plan to live in the new state permanently.
State residency flowchart
Real-world examples
Example 1: Retiree relocating from Connecticut to Florida. A retired couple in Connecticut with a $3 million portfolio realizes $150,000 in annual investment income. Connecticut state income tax at the top rate (~6.99%) costs them $10,485 annually. Moving to Florida saves $10,485 per year. Over 25 years, that's $262,125 in taxes avoided. A home purchase and relocation cost $50,000. Break-even: 4.8 years. For a couple likely to live 25+ more years, relocating makes financial sense.
Example 2: Tech worker in San Francisco considering Austin, Texas. A single engineer earning $200,000 in salary (W-2) and realizing $100,000 in stock option gains annually in San Francisco pays California state tax of roughly $19,900 per year. Moving to Austin saves the state tax on the gains ($13,300) but not on the salary (Texas has no income tax, same as California's lack of income tax for capital gains—wait, California does tax both; so savings are the full $19,900 on the combined income). Actually, correcting: California taxes all income at the full rate. Texas taxes none. Annual savings: $19,900. Over 10 years before retirement: $199,000. Relocation and home purchase: $40,000. Net savings: $159,000.
Example 3: Small business owner in Washington deciding between Seattle and Boise. A business owner in Seattle, Washington, realizes $500,000 in capital gains annually from selling a portion of her business. Washington's 7% capital gains tax on gains exceeding $250,000 costs $17,500 per year. Moving to Boise, Idaho (5.8% state income tax rate), costs $29,000 per year in state income tax. Washington is cheaper by $11,500 annually. Staying in Washington makes sense despite the capital gains tax, because the overall tax burden is lower.
Common mistakes
Mistake 1: Buying property in a no-income-tax state without fully relocating. Some investors buy a vacation home in Florida or Nevada hoping to claim residency while maintaining a primary home elsewhere. This does not work; states scrutinize residence and will assess you as a resident of the state where you spend the most time and maintain your primary ties. Buying property does not establish domicile alone.
Mistake 2: Underestimating sales and property taxes when calculating break-even. A move from California to Texas saves income tax but may increase property tax. A move from California to Tennessee saves income tax but increases sales tax significantly. Calculate the total tax burden (income + sales + property), not just income tax, to determine true savings.
Mistake 3: Claiming domicile in two states simultaneously. Some investors think they can claim to be residents of both a high-tax and no-income-tax state, choosing whichever is more favorable in any given year. This invites audits and double taxation. You can have only one domicile at a time. Establishing a new domicile requires severing ties to the old one, which takes time and documentation.
Mistake 4: Not documenting the move contemporaneously. Establish your domicile through a formal residency affidavit, driver's license change, voter registration, and mail forwarding. If audited years later, you need evidence that you moved when you say you did. Retroactive claims of residency are viewed skeptically.
Mistake 5: Forgetting about property owned in the old state. Holding investment property, rental real estate, or a vacation home in the old state undermines your claim of severing ties. Most no-income-tax states will still assert you are a resident if you own property and spend significant time there. Sell or dispose of out-of-state property to strengthen your domicile claim.
FAQ
Does moving to a no-income-tax state protect me from federal taxes?
No. Federal income tax applies to all U.S. residents and citizens regardless of state. Moving to a no-income-tax state eliminates only state income tax, not federal. Your federal capital gains rate (0%, 15%, or 20%) remains unchanged.
If I establish residency in a no-income-tax state, can I still work remotely for a California employer?
Yes, as long as you establish true domicile in the new state. However, some employers require employees to live in-state due to payroll tax nexus or contractual requirements. Additionally, California and some other high-tax states have asserted that employees working remotely for in-state employers owe state income tax. Laws are evolving; check with your employer and a tax professional.
Do I owe state income tax in my new no-income-tax state if I inherit money or receive gifts?
No. Neither inheritance nor gifts are subject to income tax in any state (as of the mid-2020s). You owe federal estate tax only if your estate exceeds the federal threshold (~$13 million per individual as of 2024–2025). Some states also impose state estate or inheritance taxes, but no-income-tax states generally do not.
If I move to a no-income-tax state partway through the year, how do I split state taxes?
You typically owe tax to both states for the portion of the year you were a resident of each. Your old state will tax income earned through your move date; your new state will tax income earned after your move date. You file partial-year returns in each state and claim credits to avoid double taxation.
Is a no-income-tax state right for me?
It depends on your income sources, spending patterns, and life stage. If you have large capital gains, substantial dividend income, or high W-2 earnings, a no-income-tax state offers significant savings. If you are early-career with modest income but high spending, sales taxes may offset the benefit. A tax professional can model your specific situation.
Related concepts
- How State Taxes Affect Your Investment Returns
- State Capital Gains Taxes and Planning
- Understanding Capital Gains Tax: Short-Term vs. Long-Term
- Tax-Advantaged Accounts: IRAs, 401(k)s, and 529s
- Moving States and Investment Taxes
Summary
Nine states—Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming, and New Hampshire—have eliminated state income tax entirely, protecting investment gains from state taxation. Washington's recent 7% capital gains tax narrows its advantage for high-income investors. Relocation to a no-income-tax state can save $10,000–$50,000 annually for investors with significant investment income, with break-even timelines of 3–7 years depending on moving costs and income levels. However, establishing domicile requires severing ties to your old state and maintaining the majority of your time and principal residence in the new state; residency disputes can trigger audits and double taxation. No-income-tax states typically compensate through higher sales or property taxes, so modeling the full tax burden (not just income tax) is essential. For remote workers, retirees, and high-income earners with large taxable portfolios, relocating to a no-income-tax state is a powerful wealth-building lever. Confirm current tax laws and your eligibility with a qualified tax professional before relocating, as rules change.