Which States Have the Lowest Overall Taxes Including Property Taxes?

by Mark Kennan, studioD

Though most people have a strong preference for the area in which they want to live, others are more flexible. If you are considering moving, consider not only the change in the salary you earn, but also the change in the income tax and property tax rates you will pay in your new location. Knowing what to expect might help you find places where you may stretch your dollars and plan a budget.

States with No Income Tax

States with no income tax are the clear winners, even when property taxes are thrown in. At the top of the list is Wyoming, with a state property tax of just 0.62 percent on average and no income tax. Nevada and Washington also have no income tax and have average property tax rates of 0.98 percent. Florida, Alaska, South Dakota and Texas also have only real estate taxes, with average rates of 1.09 percent, 1.24 percent, 1.32 percent and 1.90 percent, respectively.

States with Limited Income Taxes

Two states, New Hampshire and Tennessee, have income taxes only on interest and dividends, but not on earned income. Tennessee's property tax rate of 0.70 percent puts it just behind Wyoming's 0.62 percent property tax, but it taxes interest and dividends at 6.0 percent. If you have little or no income from interest or dividends, Tennessee has one of the lowest combined rates. However, if you earn most of your income from interest and dividends, it might not be such a great deal. Similarly, New Hampshire has no income tax except on interest and dividends, which is 5.0 percent, and a 1.92 percent real estate tax. Though the real estate tax is steep, it could still be a cheaper place to live if you don't own property or have limited interest and dividend income.

States with Income and Property Taxes

Most states have both an income tax and a property tax. Of these states, Indiana has the lowest combined rate of 4.24 percent. Indiana's property tax averages 0.84 percent and the income tax is a flat 3.4 percent. Pennsylvania has a lower income tax of just 3.07 percent, but it's 1.4 percent average property tax puts it behind Indiana. Many states have progressive income tax brackets, so how inexpensive they are tax-wise depends on your tax bracket. For example, if you are married and have a total taxable income of $49,000 in West Virginia you fall in the 4.5 percent tax bracket, which makes the state's 0.58 percent real estate tax rate more attractive. However, if you are single and making $70,000 per year, you fall in the 6.5 percent bracket, which can diminish some of the benefits of the lower property tax rate.

Income versus Property Value

The best state for you will depend in part on how much you earn and the assessed value of your property. For example, assume a taxpayer has $30,000 of taxable income and owns a $250,000 home. A property tax of 1.0 percent would cost the owner $2,500. Only if his income were taxed at 8.33 percent -- an exceptionally high rate for state taxes (according to the Tax Foundation, only Oregon's state income tax rate is that high for a person with $30,000 of taxable income) -- would the same taxpayer pay $2,500 in income taxes. Conversely, a taxpayer who rents an apartment, and therefore pays no property tax, but has $500,000 in income, would be significantly more interested in living in a state with no income tax, regardless of property tax rates. Hawaii's average property tax rate is only 0.27 percent, but the income tax rates are as high as 11 percent. Other states with average property tax rates under 0.50 percent include Alabama (0.41 percent), Louisiana (0.43 percent) and Delaware (0.49 percent).

Don't Forget Sales Taxes

The effect of sales taxes on the overall taxes will vary according to individual spending habits. Several states -- including Alaska, Delaware, Montana, Oregon and New Hampshire -- collect no sales tax, according to the Tax Foundation. Among states that have sales taxes, the state with the lowest as of Jan. 1, 2012, was Colorado, which charges is 2.9 percent. Seven states are tied behind Colorado with 4 percent rates: Alabama, Georgia, Hawaii, Louisiana, New York, South Dakota and Wyoming. Rounding out the top 10 lowest rates of states charging sales tax are Missouri at 4.225 percent and Oklahoma at 4.5 percent. California had the highest sales tax -- 7.25 percent -- as of Jan. 1, 2012, according to the foundation. Consumers in Indiana, Mississippi, New Jersey, Rhode Island and Tennessee pay a sales tax of 7.0 percent.

About the Author

Mark Kennan is a writer based in the Kansas City area, specializing in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."

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