Many travelers get confused about how taxes vary from state to state, how much they owe, and where they get the best breaks. State income taxes can be particularly challenging because eight states and one territory don't have an income tax: Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, Wyoming, and the U.S. Virgin Islands. Travelers who work in one of these states while claiming a tax home in another state may assume that they don't need to pay any state taxes. Nothing could be further from the truth.
If you're claiming a tax home, your resident state taxes your worldwide income, which you must report on your state return. You'll get a credit from your resident state for the amount that you paid to another state on the same income, but only up to the amount that it would have levied on the same income. Occasionally, this creates some inequities that have to be made up throughout the year with estimated payments-or on year-end tax returns. Generally, if your resident state has a higher income tax rate than your work state, you'll owe the difference to your tax-home state.
At first glance, you might think that states with no income taxes would be good places to transfer your permanent residence to, but remember that income taxes are only one of many taxes states can levy. For example, real estate taxes may be particularly high in a state with no income tax. Even if you don't own property but simply rent an apartment while working there, your rent will be high enough to cover the taxes the landlord has to pay. Another tax is personal property tax, levied on cars, boats, and other luxury items. Sales taxes, local income taxes, school district taxes, and fees such as license registrations may not be called taxes but still can add up.
So which states offer the overall best breaks on taxes? Based on average combined state and local tax burdens, the top 10 states to reside in are Alabama, Alaska, Delaware, Florida, Missouri, New Hampshire, North Dakota, South Dakota, Tennessee, and Texas.
To learn more, visit a Web site, such as Tax Foundation (http://www.taxfoundation.org/research/topic/9.html), which ranks taxes based on type of taxes (income, sales) and by the total burden of taxes.
NOTE: To get advice about your specific situation, be sure to consult your tax adviser.