States that don't collect income tax
7 states do not tax their residents' income: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. If you are an official resident of one of these states, you don't need to file a state tax return for that state.
In addition, 2 states only tax interest and dividend income:
- New Hampshire collects tax on interest and dividend income exceeding $2,400 ($4,800 for joint filers). More info
- Tennessee collects tax on interest and dividend income exceeding $1,250 ($2,500 for joint filers). More info
However, if you earned income by working in one of these 9 "nontaxable" states but you are a resident of a "taxable" state that does collect income tax, your resident state will tax you on the income you earned in the "nontaxable" state.
Example – Fred, a California resident, worked on a road crew in Texas and earned $25,000. Although Fred doesn't need to file a tax return in Texas, he still needs to report the $25,000 on his California tax return even though it was earned in a "nontaxable" state.
Similarly, if you're a resident in one of the 9 "nontaxable" states but you earned money in a "taxable" state, you'll need to file a return in the "taxable" state.
Example – Linda, a Texas resident, earned $32,000 while working in California as a contract writer. Because she earned the money in California, she'll need to file a California return to report the $32,000 even though she is a resident of "nontaxable" Texas.
Sales Taxes Paid Deduction vs. Itemized Deduction
If you live in one of the nine states mentioned above, your federal itemized deductions probably won't be as large as taxpayers in the other states. This is because the IRS lets taxpayers deduct state income taxes paid.
Accordingly, you might get a better tax break by taking the sales taxes paid deduction rather than the itemized deduction. TurboTax will present you with both choices in the interview, so you can select the best option for your specific tax situation.
