Where you live can have a big impact on your overall financial picture, including the taxes you pay.
There are three main tax buckets: income tax, property tax and sales tax — and each of these vary based on the state where you reside.
Each of these rates change regularly based on your state tax assessor, but several states have a history of favoring either more taxes or less taxes. And with the shift to working from home, many tax-advantaged states like Tennessee and Florida have seen waves of new residents from more heavily taxed states like New York and California.
If you're considering moving, it's important to assess each state's respective taxes to see how much of your paycheck and assets will be taxed.
Below, Select details the top five states with the largest and smallest tax burdens, what you need to know about each and how to save some on taxes, wherever you live.
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What is a tax burden?
Tax burden is the total amount of taxes paid by residents of a state, considering the three largest tax buckets of income tax, property tax and sales tax. Of course, there are plenty of other taxes worth considering including federal income tax, Social Security taxes and capital gains taxes.
Altogether, the average American will shell out over half a million dollars in taxes over their lifetime, according to Self Financial. However, the big three are what Americans spend the most on.
Here are the top five states with the smallest and largest tax burdens:
States with smallest tax burdens
Alaska
Alaska has the lowest tax burden throughout the entire U.S. It's one of nine states currently with no state income tax. The property tax is on the higher side at 3.68%, but the sales tax is near the bottom at 1.42%.
Total tax burden: 5.10%
Tennessee
Tennessee comes in second on the list. Its residents pay low property taxes of 1.70%. There is no state income tax, however, sales tax is on the high side at 3.96%.
Total tax burden: 5.74%
Wyoming
Wyoming comes in with the third lowest tax burden among the 50 states. The state has no state income tax, and low sales tax of 2.81%. However, Wyoming has a higher-than-average property tax rate of 3.33%.
Total tax burden: 6.14%
Delaware
Delaware has the fourth-lowest tax burden, however, it comes in the top 10 for state income tax at 3.25%. But for property and sales taxes, they fall nearly last in both categories at 1.77% and 1.19%, respectively.
Total tax burden: 6.21%
New Hampshire
The fifth lowest tax burdened state is New Hampshire, which also charges no state income tax. However, it makes up the lost tax revenue with the highest property taxes in the U.S. at 5.47%. There's a modest sales tax of 1.24%, so if you plan on renting in New Hampshire, your taxes will be extremely low.
Total tax burden: 6.84%
States with largest tax burdens
New York
Unsurprisingly, New York has the largest state tax burden. Residents pay 4.4% in property taxes, 4.96% in income tax and 3.43% in sales tax.
Total tax burden: 12.79%
Hawaii
In 2019, nearly 850,000 non-residents visited the Aloha State. As a result, the state sales tax is the highest in the country at 6.65%. Residents pay 2.45% property tax and 3.09% in income tax.
Total tax burden: 12.19%
Vermont
The Green Mountain State comes in at third on the list. Being a property owner in Vermont comes with the second highest property tax rate of 5.04%. That's combined with middle-of-the-pack income tax rate of 2.41% and sales tax rate of 3.3%, respectively.
Total tax burden: 10.75%
Maine
The Pine Tree State comes in at fourth on the list. Similar to Vermont, Maine has high property tax rates of 4.6%, complemented with moderate income tax of 2.45% and 3.45% sales tax.
Total tax burden: 10.50%
Connecticut
Coming in at fifth on the list, Connecticut is in the top 10 for both property and income taxes at 4.06% and 3.56%, respectively. Sales tax is on the lower end of the scale at 2.82%.
Total tax burden: 10.44%
How to reduce your tax burden
Regardless of where you live, there are several legal things you can do to reduce your tax burden.
Take advantage of tax-advantaged retirement accounts
Retirement accounts like a 401(k) or IRA are great ways to defer taxes to a later date, while also growing your net worth. In 2022, you can contribute up to $20,500 in pre-tax income to your employer sponsored 401(k), and defer paying them until you're ready to start withdrawing the money in retirement. If you're employer doesn't offer a 401(k), it's easy to open an IRA through a financial company like like Wealthfront or Fidelity.
Additionally, if you have a high deductible health plan (HDHP), you can contribute to a Health Savings Account (HSA) if your employer offers one. If they don't, you can contribute with post-tax money, and you will earn a tax write-off for your contribution.
Make charitable donations
Donating can be a great way to help your favorite nonprofit organization, but also help you reduce your taxable income. By donating to a verified nonprofit like a 501(c)(3), you can earn a tax write-off. What's more is that many nonprofits accept donations via credit card, so you can earn points and miles along the way.
Sell off losing investments
As the popularity of investing in stocks through popular apps like Robinhood skyrocketed during the pandemic, you may find yourself with a few stocks that are losers. If you have investments that are in the red, you can sell those off to take advantage of tax loss harvesting. By capturing those losses, you can write those off to reduce your taxable income.
Bottom line
Paying taxes is unavoidable, but where you live and work can have a big impact on just how much you pay. If your tax bill is too much to stomach, and you have the flexibility of working from home, moving states could be something to consider. But if circumstances are keeping you put where you are, there are several ways to reduce your taxable income, including saving for retirement.
If you're interested in more complex tax-saving strategies, you should consider hiring a qualified tax professional like a CPA.
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