There are 9 US states with no income tax, but 2 of them still tax investment earnings

Personal Finance Insider writes about products, strategies, and tips to help you make smart decisions with your money. We may receive a small commission from our partners, like American Express, but our reporting and recommendations are always independent and objective.

  • Most Americans file a state income tax return and a federal income tax return.
  • The states with no income tax are Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming.
  • If you live in one of those seven states — or New Hampshire or Tennessee, which don't tax income but do tax investment earnings — you may not need to file a state return.
  • See Business Insider's picks for the best tax software »

If you owe at least $5 in federal income taxes, you have to file a federal tax return. Some people, however, are off the hook when it comes to filing a state tax return.

That's because seven US states don't impose state income tax — Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming.

New Hampshire and Tennessee don't tax earned income either, but they do tax investment income — in the form of interest and dividends — at 5% and 1%, respectively, for the 2020 tax year. If you live in either state and received income from your investments, you may need to file a state return.

The other 41 states have either a flat income tax — meaning everyone, regardless of how much they earn, pays the same percentage of their income to the government — or a progressive income tax, which means your tax rate is determined by your income. 

The map below lists the top tax rate in every state for the 2020 tax year.

But living in a state with no income tax doesn't necessarily mean you're getting off scot-free. Texas and New Hampshire, for instance, may not tax your earnings, but they do have some of the highest property tax rates in the country, which could ding you if you're a property owner.

Likewise, Tennessee doesn't tax your paycheck, but it will get you in the checkout line. The state has one of the highest average state and local sales tax rates in the country at 9.53%, according to the Tax Foundation.

Still, everyone is subject to federal income taxes regardless of where you live. How much you pay depends on how much you earn, your filing status, and what deductions are available to you. In 2018, about 76 million Americans didn't owe federal income tax because their earnings were too low.

After you file your taxes, you may get a state tax refund or a federal tax refund — or both if you live in a state that taxes income. The IRS says the fastest way to get your tax refund is the method already used by most taxpayers: filing electronically and selecting direct deposit as the method for receiving your refund.

Have tax questions? Connect one-on-one with a tax professional through JustAnswer, a Business Insider partner »

Source: Read Full Article