Many taxpayers assume that living in a state with no income tax means they are entirely free from state-level tax obligations. While it’s true that some states do not require residents to file a traditional income tax return, this doesn’t necessarily mean you’re off the hook for all tax-related filings or payments. This detailed blog explores the implications of living in a no-income-tax state, what residents still need to file, and how it might impact your federal return.
Which States Have No Income Tax?
As of 2025, the following nine states do not impose a personal income tax:
- Alaska
- Florida
- Nevada
- New Hampshire (no wage tax, but taxes interest/dividends)
- South Dakota
- Tennessee
- Texas
- Washington
- Wyoming
Each of these states has made up for the absence of an income tax in other ways, often through higher sales taxes, property taxes, or taxes on specific types of income like investments or business receipts.
Common Misconceptions
Just because you live in a state with no income tax doesn’t mean:
- You won’t owe federal income taxes.
- You don’t have to report certain state-level transactions.
- You don’t need to file returns if you earn income in other states.
- You’re exempt from local taxes, excise taxes, or business taxes.
What You Might Still Need to File
1. Federal Income Tax Return (Form 1040)
Regardless of which state you live in, you are still required to file a federal income tax return if your income meets the IRS threshold. This includes wages, self-employment income, dividends, interest, and other forms of taxable income.
2. Local or City Income Taxes
Some states without a statewide income tax still have local jurisdictions that impose taxes. For example, cities or counties may levy local income taxes or occupational taxes on residents or employees.
3. Business Tax Filings
If you own a business or are self-employed in a no-income-tax state, you may still be required to file business-related tax returns or pay franchise or gross receipts taxes. For example:
- Texas: Businesses must file a Texas Franchise Tax Report annually.
- Washington: Requires a Business & Occupation (B&O) tax return for businesses.
- Nevada: Has a Commerce Tax for businesses with gross revenue over a certain threshold.
4. Tax on Investment Income
Even in states without a wage-based income tax, you might be taxed on interest and dividends. New Hampshire, for instance, imposes a 5% tax on interest and dividend income for individuals earning above certain thresholds. Washington has also implemented a capital gains tax on certain investment income starting in recent years.
5. Real Estate and Property Tax Declarations
Homeowners in no-income-tax states may still have to file property tax declarations or applications for exemptions, such as the homestead exemption or senior tax relief programs.
6. Sales and Use Tax Reporting
Most no-income-tax states have higher-than-average sales tax rates. If you run a business or purchase items out of state for use in your home state, you may be required to report and remit use tax on those purchases.
7. Filing in Other States
If you live in a no-income-tax state but earn income from another state that does impose a tax, you may still be required to file a nonresident state income tax return. Examples include:
- Remote work income sourced to another state
- Rental property in a taxable state
- Partnership income from a business in another state
Potential Refund Implications
Living in a no-income-tax state can be financially advantageous, but it may also affect your refund dynamics:
- You won’t receive a state refund because there is no withholding.
- You may lose out on some state-level credits available in income-tax states (like Earned Income Credit or renter credits).
- You may not be eligible to deduct state taxes paid on your federal Schedule A (Itemized Deductions) unless you earn and pay tax in another state.
Special Filing Requirements by State
Texas
No personal income tax, but businesses must file franchise tax reports. Some local jurisdictions impose property and sales taxes that may require reporting for business entities.
Florida
No state income tax or franchise tax on individuals. However, corporations may be subject to a Florida corporate income tax if operating as a C corporation.
Washington
Although no personal income tax, Washington implemented a capital gains tax that applies to the sale of certain investments if the gains exceed the annual exemption limit. Businesses must file B&O tax reports.
New Hampshire
No income tax on wages, but a 5% tax on interest and dividends. If you have significant investment income, you must file Form DP-10 annually.
Alaska, Nevada, South Dakota, Wyoming
These states require no personal income tax or investment tax, but business owners may need to file and pay licensing, excise, or franchise fees depending on the industry and location.
How to Stay Compliant
- Consult your state’s Department of Revenue: Always review your state and local tax requirements even if your state has no income tax.
- Report out-of-state income: Use the proper nonresident state forms if you worked or earned income in other states.
- Track investment income: If you live in New Hampshire or Washington, monitor your capital gains or interest/dividends to stay compliant with any applicable taxes.
- Use professional help if unsure: Tax preparers familiar with multi-state filings can help avoid costly mistakes or missed filings.
Conclusion
While not having a state income tax may seem like a major advantage, residents of these states must still navigate various other tax requirements—from business filings and investment tax disclosures to out-of-state returns. Understanding what you still need to file helps you stay compliant and ensures you aren’t caught off guard by a surprise tax bill or penalty. Always check your local and state agencies for updated requirements, and consult a tax professional if your situation is complex or spans multiple states.
