by Dan Dzombak, The Motley Fool

There are seven U.S. states with no income tax, while another two states have no income tax on wages but do tax interest and dividends — an important consideration for retirees. The grass isn’t always greener on the other side of the state line, though. These states still need money for government services, and they raise it through other means, namely sales taxes, property taxes, and other fees. Depending on your situation and your willingness to move, with some planning you could start paying less in taxes and keeping more of your income. Read on to find out more.

States with no income tax:

  • Alaska
  • Florida
  • Nevada
  • South Dakota
  • Texas
  • Washington
  • Wyoming

States with nearly no income tax:

  • Tennessee
  • New Hampshire

Let’s examine each of the states with no income tax using each state’s data on tax revenue as well as the Tax Foundation’s most recent data, which is for 2011. The Tax Foundation has been collecting data on taxes since 1937, and its data takes into consideration a per-capita average of both state and local taxes.

1. Alaska

If saving money is your only concern, Alaska is the best place for you. Of course, with its distance from the rest of the country and harsh winters, America’s northernmost state is not for everyone. According to the Tax Foundation, the average state and local tax paid per capita was $3,319 — the 18th-lowest amount out of all 50 states. Senior citizens get an added incentive to live in Alaska, as the state exempts them from the first $150,00 of assessed value for property taxes.

With no state sales tax and relatively low property taxes, Alaska funds itself through royalties on oil and gas production. Besides low taxes, residents of Alaska get a direct benefit from these royalties through Alaska’s Permanent Fund, which pays full-year residents of Alaska a yearly dividend based on the earnings of the royalties.

The fund has paid out an average of $1,100 per year the past five years! Though the level has been decreasing as oil and gas prices and Alaskan production have dropped, that’s still a decent chunk of change for simply living in the state. If you subtract the average dividend from the average per-capita state and local taxes paid, you get $2,200. That would be the lowest net per-capita state and local tax bill by $400.

2. Florida

Florida’s warm weather has long been a draw for tourists from around the world and retirees who are fed up with winter. As an added draw for residents, Florida has not had a state income tax since it was repealed in 1855. The state mainly funds itself with a 6% sales tax and property taxes. In 2011, the average per-capita state and local tax paid in Florida was $3,699, according to the Tax Foundation — the 24th-highest out of all 50 states.

3. Nevada

Nevada’s gambling and tourism industry has long been the state’s main draw, though its non-gambling tourism has grown through the years through shows, conventions, retail, nightclubs, and electronic dance music. The lack of individual and corporate income taxes is a big draw for businesses and residents alike. However, Nevada has a modified business tax that taxes businesses 1.17% (2% for financial institutions) on the wages paid in the state after deducting health care expenses.

4. South Dakota

South Dakota, my favorite state in the Midwest to drive through, has the fifth-smallest output in the U.S., and its economy is mainly powered by farming and tourism. Besides Wall Drug, the best road-trip stop in the U.S., the state is known for numerous national parks, the historic city of Deadwood, and the Sturgis Motorcycle Rally.

With no income tax on individuals or corporations, the state funds itself through a 4% sales tax and various use taxes. In 2013, the sales and use tax made up 71% of the state’s revenue. Perhaps unsurprisingly, given the state holds the largest motorcycle rally in the U.S., motor fuel taxes are the second-largest contributor to the state’s coffers at 9%. In 2011, the average per-capita state and local tax paid was $3,052, according to the Tax Foundation — the seventh-lowest out of all 50 states.

5. Texas

Texas funds itself through a 6.25% sales tax, taxes on motor vehicle sales and fuel, and taxes and royalties on oil and natural-gas production. Texas has no corporate income tax and is greatly helped by the oil and gas throughout the state and the Gulf of Mexico. In 2011, the average per-capita state and local tax paid was $3,088, according to the Tax Foundation — the eighth-lowest out of all 50 states.

6. Washington

Washington is a great example of the need to check all the data. The state primarily funds itself through a 6.5% sales tax that makes up more than 60% of its revenue. Localities add to this, so the sales tax can be as high as 9.5% in some areas. While the state has no corporate income tax, it does have a gross receipts tax, which charges businesses roughly 1% of revenue. This may not sound like much, but if a business is losing money, it still owes the government money at the end of the year, which is not the case with a corporate income tax. Such high sales taxes and property taxes add up. In 2011, the average per-capita state and local tax paid was $4,366, according to the Tax Foundation — the 12th-highest in the U.S.

7. Wyoming

Wyoming funds itself mainly through its natural-resources taxes, as well as property taxes. The state has a property tax rate of 9.5%, though its sales tax is only 4%. In 2011 the average per-capita state and local tax paid was $3,500, according to the Tax Foundation — the 22nd-lowest in the U.S.

States with nearly no income tax

1. Tennessee

Tennessee has no income tax but does have a “hall tax” — that is, a 6% tax on interest and dividends, which is specifically allowed by the state constitution. Tennessee also has a 7% sales tax. Income taxes are a contentious issue in Tennessee. The state constitution gives the government the right to tax property as well as income from stocks and bonds, but it does not mention personal income. Every so often lawmakers try to institute an income tax, as the constitution does not specifically bar this. This November, Tennesseans will vote on an amendment to the state constitution to ban any future taxes on payroll or personal income.

While Tennessee has no income tax on wages, if you are a retiree living off of dividends and interest income, you should think twice before moving to Tennessee for the tax benefits. In 2011, the average per-capita state and local tax paid was $2,777, according to the Tax Foundation — the second-lowest in the U.S.

2. New Hampshire

New Hampshire, like Tennessee, has no income tax on earned income but has a 5% tax on interest and dividends. The state has no sales tax but has an 8.5% corporate tax rate, as well as high property-tax rates, which add up. In 2011, the average per-capita state and local tax paid was $3,769, according to the Tax Foundation — the 22nd-highest in the U.S.

Bottom line

When it comes to a state’s tax rates, there’s more to consider than income tax, but it doesn’t hurt to start there, especially if you’re living off interest and dividends.

The Motley Fool is a USA TODAY content partner offering financial news, analysis and commentary designed to help people take control of their financial lives. Its content is produced independently of USA TODAY.

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