The year is coming to an end and that means it is time to start preparing for tax season. For most of us, we’ll be gathering information to submit our tax returns to both the federal and state governments. However, for seven states (eight by 2022), the folks who reside there are not subject to state income tax – Alaska, Florida, Nevada, South Dakota, Texas, Washington, Wyoming, and Tennessee (2022). We are going to take a more in-depth look at one of these states, Florida, to get a better understanding of the tax situation for a state which does not tax personal income.
To begin, we should mention that income is not the only thing that goes untaxed in Florida, they do not assess any death taxes either – this means that there is no estate tax or inheritance tax in Florida. The absence of these taxes is one of the biggest factors that makes Florida a prime state for retirement. Maintaining appeal for retirees is not the only thing preventing Florida from adopting an income tax though. In 1924, they passed an amendment to the Florida constitution that prevents the state from collecting income tax. Article IX, Section 11 states:
No tax upon inheritances or upon the income of residents or citizens of this state shall be levied by the State of Florida, or under its authority…
So, what do Floridians end up paying taxes on? Let’s take a look. We’ll start with property taxes, the largest contributor to the taxes that the average Floridian pays according to taxfoundation.org.
Property taxes in Florida are actually assessed at the local level, not the state, and the state government does not receive any of the money from the tax. The property tax can vary by county and you’ll pay taxes on the assessed value of the property from January 1st. Luckily, for FL residents, the assessed value of a home cannot increase by more than either 3% or the Consumer Price Index change, whichever is less, from one year to the next because of Florida’s “Save Our Homes” assessment limitation. It’s worth noting that in addition to this cap, there are several exemptions offered by Florida to help offset the burden on residents. If you’re interested in those, read the bullets. If not, feel free to skip on over to the next paragraph.
Homestead Property Exemption
If someone owns a permanent residence for themselves or one of their dependents, they are eligible to receive an exemption of up to $50,000. The first $25,000 applies to all property taxes, including school district taxes. Any additional exemption is only applied to non-school taxes.
Seniors 65 Or Older
For those that meet requirements from one of two options, they could be eligible for an additional $50,000 in exemptions or an exemption equal to the full assessed value of the property.
Widow, widower, blind persons, or totally and permanently disabled persons can receive a $500 exemption.
Quadriplegics who own and use their home are eligible to receive a full exemption.
Totally and permanently disabled persons or legally blind individuals who have gross income below a threshold are eligible for a full exemption.
Spouses of a first responder who died in the line of duty while employed by the state are eligible for a full exemption.
Active Duty Military and Veterans
A person serving in the Armed Forces who owns and uses their property as a homestead can rent the property without abandoning their claim to the homestead exemption.
An ex-servicemember who was honorably discharged and is disabled to a degree of 10% or more due to wartime service may be eligible for a $5,000 reduction in the property’s assessed value.
Florida residents who are Veterans with total and permanent disabilities that were honorably discharged may be eligible for a total exemption. A similar exemption is also available to veterans who are confined to wheelchairs.
Veterans over 65 with partial or totally permanent disabilities may be eligible to receive a discount on the assessed value of the property that they own and use as a homestead.
Well now this is even more confusing, right? The state collects no income tax, no death taxes, and one of the largest taxes paid by residents contributes solely to the local governments. How is this possible?! The sales and use tax, that’s how. With a booming tourist economy, Florida is able to make up the majority of their revenue needs through these taxes. Additionally, they collect smaller, but not insignificant, revenues from corporate taxes, fuel taxes, documentary stamp taxes, and a few others.
Sales and Use Tax
The general sales and use tax rate is 6% with the exception of amusement machine receipts (4%), lease or license of commercial real property (5.8%), and electricity (6.95%). Food and medicine are exempt from sales tax. In addition to the state level, counties can assess additional sales tax. Of the 69 counties, 62 of them now (up from 61 due to the recent election) impose their own sales tax.
As we mentioned, there is a huge tourism industry and that 6% sales tax also applies to hotels and restaurants. A nice bonus for the state without affecting their residents too much.
Florida has a corporate tax of 5.5%.
There is a state tax on fuel sales for gasoline, diesel, and aviation fuel. Counties can assess additional taxes on fuel too. According to thebalance.com, the gas tax for drivers is 59.76 cents per gallon as of 2018. This puts Florida as the 8th highest state for gas taxes in the country.
Documentary Stamp Taxes
This applies to all documents that transfer interest in Florida, such as warranty deeds and quit claim deeds.
In addition to those listed above, Florida has some other taxes that are assessed such as excise taxes on tobacco and communication services, taxes on insurance premiums, surcharges on rental cars, taxes on pollutants, and a few others.
Overall, the tax burden in Florida is very friendly for individuals. Driven largely by the lack of state income tax, the state consistently ranks as one of the lowest tax states in the country. According to Kiplinger, they have ranked Florida as the 4th friendliest for 2018 and the top 5 states are all states with no income tax.
Jealous of Florida’s tax situation? As a New Yorker, I know I sure am. Our income tax rate tops out at 8.82% and can go as high as 12.7% with the local tax in some areas. On top of that, we have an estate tax too. Perhaps I should consider early retirement and move to FL.
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