Top 3 Best No Income Tax States for High Net Worth Individuals – PillarWM
Top 3 Best States With No Income Tax for High Net Worth Individuals
If you’re a high net worth individual looking for ways to avoid high taxes, you have probably considered moving to a state with no income tax.
You’ve come to the right place, because you’re about to find out which states offer the best tax scenarios for anyone, including those with ultra high net worth. We’re going to start with nine, and then whittle it down to the top 3.
You should also consult your wealth manager because the tax laws are constantly changing.
For those with over $5 million liquid investable assets, we also suggest you request a copy of our book – 7 Secrets to High Net Worth Investment Management, Estate, Tax, and Financial Planning.
High net worth tax-planning strategies are numerous and complicated. Discover the multitude of strategies for avoiding taxes that are best suited to your family’s needs, wants, and life-goals in our published book "7 Secrets To High Net Worth Investment Management, Estate, Tax and Financial Planning".
This article will help you see which states hold the most promise for your next residence free from income taxes.
Are Florida and New Hampshire Really Better for Your Financial Well-Being?
The List – 9 States With No Income Tax
Look Closer at the No Income Tax States
Remove Washington from Your List
Your Top 3 States With No Income Tax
Other Taxes to Consider
Ready to Choose the Best State Without An Income Tax?
If you are a high net worth family or individual living in a high income tax state such as California, New York, New Jersey, or Oregon, you’ve probably given some thought to moving to a state with no income.
California state income tax is the highest in the nation, sporting a dreadful 13.3% at the top level.
And when you combine that with sales, property, and other taxes and fees, you’re paying a lot of taxes for that sun, not to mention the wildfires.
Current tax law caps your federal tax deduction for state and local taxes at $10,000. While this doesn’t affect most people, it costs our ultra-high net worth clients a pile of money because they pay far more than $10k in state and local taxes – especially those who live in high tax states.
You’ll pay even more for the property tax rate if you also own investment real estate properties. (If you’re curious, here are the rates of income tax by state, ranked from highest to lowest).
Is the solution to move to a low income tax state?
It’s not that simple. Every state collects taxes. So while there are some states without an income tax, that must mean they charge higher taxes somewhere else.
The question is, how does all this affect you and your high net worth or ultra-high net worth friends? How does it affect your specific situation and finances?
If you’re considering a change of residency and want to get an ally on your side, schedule a chat with Pillar Wealth Management CEO and co-founder Hutch Ashoo.
When you talk, be sure to mention you’re thinking about a change of residence. We will help you identify your best living experience that will allow you to protect and secure more of your wealth.
To really dive into selecting a new state of residence, you must take a detailed look at each state you might consider moving to. What does each have in its favor, and what counts against it?
We’ll look at the nine no income tax states, and then winnow it down to the top three.
There are many considerations when you accumulate enough assets to reach ultra-high net worth status. You want to put extra thought into choosing the best financial advisor for your family, especially if you hope to optimize your portfolio and take advantage of the benefits tied to states with no income tax.
First, let’s be clear on the list of states. The nine states with no income tax are:
The last two, Tennessee and New Hampshire, have no income tax but they do charge tax on dividend income and investment income.
While that might not be a big deal for most people living, whether their state charges an income tax or not, it matters a great deal to most high net worth investors.
Most high net worth families earn a good portion of their income through investments.
Unless you are a rare exception to that, you can probably take Tennessee and New Hampshire off your list, which leaves seven states.
You can probably narrow this list of seven states with no incomes tax down to just a couple based on your needs and personal preferences without much effort.
Here are our thoughts on three of these states:
1. No Income Tax in Alaska – But It’s Cold
Living in Alaska isn’t for most people. That’s why hardly anyone does. Unless you like the idea of living in extreme cold and darkness during the winter and being bathed in sunlight for 18 hours or more per day in the summer, Alaska probably isn’t for you either.
But if you’re okay with the weather and like the relative isolation, living in Alaska does come with the perks of no income tax, low sales tax, low property tax, and low excise tax.
Residents of Alaska receive investment earnings and dividends from corporations.
2. No Income Tax in Wyoming – But It’s Windy
Wyoming is a mostly rural, hilly, windy state with pretty remote population centers. It is actually less populated that Alaska.
There are no retirement income taxes or personal income taxes, with low sales tax rates and property taxes for residents. The tax burden, including sales, property, income, and excise taxes, makes Wyoming a great place to live from a financial perspective.
So if you can handle the isolation, wind, and cold, plus proximity to great places like Yellowstone, it might be for you.
3. No Income Tax in South Dakota – But It’s Snowy
South Dakota is similar in many ways to Wyoming, though not quite as extreme. It gets hit with blizzards and fairly extreme winters. You’ll drive a lot, and you won’t get many non-local visitors.
It has higher property tax rates, but being the home of many large credit card companies, South Dakota keeps residents from paying income taxes.
If cold, wind, darkness, sparse population and the other attributes of these three states appeal to you – and they do for certain people – then those states would actually be at the top of your list if you’re looking to move to a state with no income tax.
However, since we know most people do not prefer to live in those types of states, let’s consider the remaining four states: Florida, Texas, Washington, and Nevada.
Though Washington has a lot in its favor in terms of scenery, accessibility, cultural diversity, and business opportunities, it has one major point against it that matters particularly for high net worth and ultra-high net worth retirees.
And it’s a big one:
Washington has the highest maximum estate tax in the US and only a $2 million exemption, taking 20% of your estate if you are in the highest bracket. See all the states with estate or inheritance taxes.
With the federal government also taking 40% of your estate beyond the approximate $11 million exemption, ultra-high net worth individuals in Washington stand to lose over half their net worth upon their deaths!
Click to tweet: Washington: The highest tax state of all the states with no income taxes
The best solution is to not live in a state that charges this type of punitive tax. So Washington is out.
No matter where you live, you can do a few things to minimize your exposure to federal estate taxes. This is one of the most valuable services you get when you work with Pillar Wealth Management, and we don’t charge anything extra for it.
Please talk with us about your situation and why you’re thinking about moving to a state with no income taxes. We can run several residency scenarios based on your personal situation.
Florida income tax is zero. Texas income tax is zero. And Nevada income tax is zero.
That’s a great start, but what else is so great about living in these states, for high net worth individuals?
Let’s take a look at seven of the broadest benefits of living in states with no income tax.
Every state has its own minor differences and tax laws can change at any time. These are general benefits and do not necessarily apply to all these states. Consult your tax accountant or wealth manager for specifics.
1. No Worries about State and Local Tax Deductions
Living as residents in these states with no income tax, you will probably be able to claim your sales tax as a deduction for your federal taxes.
The only caveat to this is if you own a lot of real estate in these states or make some large purchases that incur five or six figures in sales taxes. In those instances, you would lose out on the highest possible federal tax burden. But since no state can offer any tools around that, it’s a non-factor in terms of where you choose to live.
2. No Estate Taxes
When you die, the state governments of Florida, Texas, and Nevada won’t take any of your wealth.
Click to Tweet: Florida, Texas, Nevada: No income tax, and no estate tax
3. Social Security and Retirement Income Belong to You
Without an income tax, you will not have to pay any state taxes for your retirement income. That amounts to huge savings compared to high tax states, which in some cases take over 10% of your personal income.
4. Retirement Income Not Taxed
Living in states with no income tax also means you will not pay a tax rate on withdrawals from your IRA or 401k accounts. Minimizing your federal income taxes from these accounts is one of the great challenges of having a high net worth, so it’s a great relief to not have to worry about it at the state level.
5. It Doesn’t Matter Where You Lived Before
This is a really great one:
Even if you lived in a high income tax state like New York or Oregon while you were contributing to your IRA and 401k accounts, when you move to a no income tax state, you avoid having to pay state taxes on the distributions or growth.
6. No Small Business Taxes Either
In Florida, the only businesses that pay taxes are C corporations. LLCs, partnerships, sole proprietors, and S corporations pay no state business taxes.
Texas and Nevada are not quite as free from business taxes as Florida, but they’re still much better than the high tax states. Again, check with a tax accountant to get these sorts of specifics.
But this is a point in favor that might edge Florida up to the top of your list. Here’s an article with more on Florida’s business tax laws.
Another point in Florida’s favor is what they call the homestead exemption. While perhaps not a huge benefit for someone with a high net worth, this exemption lets you remove the first $25,000 of your home’s assessed value from school district property taxes, and the first $50,000 from all other types of property taxes.
Florida Might Be the One
More than any other state, Florida seems to have gone out of its way to become the most tax-friendly state in the nation.
Click to Tweet: Florida has gone out of its way to become the most tax-friendly state in the nation
Retirees don’t just move there for the sun. They also move there because it saves them a lot of money on taxes. And high net worth retirees will save even more.
In fact, we were recently working on a Wealth Management Analysis for an ultra-high net worth family planning to move to Florida. After we finished, we noticed several things that were quite amazing:
With the same investment plan, this family would make $150,000 more living in Florida compared to living in California. Just by switching their residency and making no other changes, they make an extra six figures annually in the state.
As you can see, a change of residence may be one of the easiest ways to improve the performance of your portfolio.
And if you think that’s good, look at this one:
According to Business Insider, an ultra-high net worth investor making $10 million a year and who owns a $10 million home will pay $1.2 million more in taxes living in New York compared to Florida.
See a full list of Florida’s tax benefits from their state website.
Are you curious about how a change of residency could help you? If you would like more information about states with no income taxes, schedule a chat with CEO and co-founder Hutch Ashoo to start the conversation.
Don’t forget – every state has to collect taxes somehow. Nevada and Texas income taxes may be zero, but they have very high property taxes.
Most of these states with no income taxes also have high sales taxes. Washington has the third-highest gas tax in the nation, very similar to California’s.
However, what counts is your effective state tax rate. In other words, when you add it all up, what percentage of your income are you paying in state taxes?
For high net worth families with incomes in the top 20% living in one of the states with no income taxes, you will pay an average of 2.6% in state taxes, compared to 7.5% in the other states.
So on average, it’s three times less costly for you and your high net worth friends to live in a state with no income taxes.
Hopefully, this content has given you a good start as you think about the pros and cons of moving to a state without an income tax.
Remember, you have to consider much more than just the tax situation. Weather is a major consideration, but so might be proximity to family and friends, lifestyle, political preferences, recreational opportunities, population density, real estate options, and so much more.
There is more involved in deciding where to move than just money. Here’s an article with more on what each no-tax state has in its favor
And, especially if you own a business or have investment income in your current state, moving to save on taxes isn’t so simple. Determining where your actual residence is and whether it matters how you’re generating your income requires additional consideration. We’ll tackle that content in our next article – How to Determine Residency for Tax Purposes.