Some states index tax brackets, exemptions, and deductions for inflation;. Table 1 shows how each state's individual income tax is structured. New Hampshire taxes dividend and interest income exclusively, while Washington only taxes capital gains income. Any amount of Connecticut taxable income to which, as provided in the previous sentence, the 3 percent tax rate does not apply will be an amount to which the 5 percent tax rate will apply.
For example, while citizens of the state of Washington do not pay income taxes, they end up spending more than 8% of their annual income on sales and consumption taxes. However, these states with the lowest income taxes may be a good place to start looking for a more affordable location. States vary in terms of their personal income tax floors, deductions, exemptions, credits, and definitions of taxable income. Some states index tax brackets, exemptions, and deductions for inflation, while many others don't.
State income tax rates get relatively little attention compared to federal income taxes, but they can still take a toll on your pocket. Often, the biggest tax penalty citizens face after paying the Internal Revenue Service is the one filed by their state. And, as with federal returns, the amount you'll pay to your state also depends on your marital status to file returns, whether you have dependents, and whether you qualify for tax deductions and credits. While taxes may not be the first thing you consider when deciding where to live, knowing the tax situation of the places you're considering moving to could help you save in the long run, especially when you retire.
Low personal income tax rates can be misleading; a lack of available tax deductions, for example, can increase the effective rate you pay. By contrast, 30 states and the District of Columbia impose income taxes with incremental rates, and the number of brackets varies widely from state to state. In New Hampshire, for example, regular income is generally not subject to state taxes, but a fixed tax rate applies to dividends and interest income. Arizona joined the growing list of states with a fixed structure of individual income taxes, a year earlier than originally expected.
Some states link their standard deductions and personal exemptions to the federal tax code, while others set their own or offer none at all.