South Dakota Income Tax Explained
South Dakota has no income tax or corporate income tax. The state relies heavily on property and sales taxes to generate income. Sales tax rates of South Dakota are among the lowest in the nation. On the other hand, South Dakota's average effective property tax rate is higher than the national average.
If relocating to South Dakota, you may want to consider additional variables such as:
● Taxes on sales, excise tax, and property tax
● Reduced tax burden on a state's capacity to fund social programs like road construction, school construction, and health care provision
This article will explore South Dakota's applicable taxes and whether the state charges its own state income tax. Read on!
South Dakota Property Taxes
Property taxes in South Dakota are pretty simple. Residential property taxes are based on the property's market value, which is determined by local governments such as municipalities and school districts. The average effective property tax rate for the state is 1.22 %. South Dakota residents who own a main house are eligible for a tax break.
These tax authorities include school districts, cities, townships, counties, water, and extra special districts for particular reasons such as fire protection or sanitary systems, which may all levy property taxes in South Dakota. Property that is legally owned and used by the owner is taxed at a reduced rate than that of other forms of property.
The owner-occupied categorization may be applied for once by new homeowners. In order to continue receiving property tax reductions, you must continue to own and reside in the house where you earned the designation. Owner-occupied categorization lowers property taxes for homeowners in the school system.
Sales and Use Tax
When it comes to providing essential public services like public safety, transportation, and health care, South Dakota depends significantly on taxes. All retail transactions, such as the sale, lease, or rental of tangible personal property, as well as the sale of services, are subject to sales tax. The state's sales and use tax rate is 4.5%.
To be able to collect sales tax, a company in South Dakota must have a sales tax collection permit issued. Services, as well as physical goods, make up a significant portion of gross sales and transactions. Non-South Dakota firms are not subject to the minimum requirements stated below.
Any company that does not have a physical presence in South Dakota is also required by law in South Dakota to get a South Dakota sales tax license and pay the relevant sales tax if it fits one or both of the following criteria:
● Gross sales to South Dakota by your company surpassed $100,000
● Your company made two hundred or more distinct sales to South Dakota
States Without Corporate Income Tax
Most states tax some types of company revenue that originate within their borders. On the whole, the specifics of how a business's income taxes are calculated are determined by the business's legal structure. S corporations, LLCs (Legal Liability Companies), partnerships, and sole proprietorships are all subject to a state's personal income tax in most states.
In contrast, corporations are subject to a corporate income tax. Taxes on both personal and business income might vary substantially from state to state. Corporate tax rates typically range from 4% to 10%, with most rates being constant regardless of income.
Some states have personal tax rates as high as 9% or higher, depending on the individual's taxable income. There are now six states (South Dakota, Nevada, Ohio, Washington, Texas, and Wyoming) that do not impose a corporate income tax. However, Nevada, Ohio, Texas, and Washington all impose some kind of corporate tax on businesses.
There are also no personal income taxes in Nevada, South Dakota, Texas, Washington, Alaska, and Florida. Only interest and dividend income are prone to state and local taxes in New Hampshire and Tennessee.
Franchise Tax by States
Many states levy an additional tax on at least some enterprises, known as a franchise tax or privilege tax, in addition to the business tax or personal income tax. In many cases, this tax is justified as an additional fee for conducting business in the state.
The nature of a state's franchise tax, like state taxes on corporate revenue, frequently relies on the firm's legal structure. Depending on the jurisdiction, franchise taxes may be either a flat cost or a percentage of a company's net value. Only four states do not levy a personal or corporate income tax.
On the other hand, South Dakota is one of the most tax-friendly states in the nation. However, even in jurisdictions like Nevada and Washington, where corporations and individuals are exempt from paying income tax, firms must still pay some essential taxes.
While gaming-related firms in Nevada pay taxes based on their gross revenues, most businesses in Washington pay a wage tax. The South Dakota bank franchise tax is the only significant exception to the state's lack of large corporate taxes. There are increasingly decreasing marginal rates for the tax depending on the institution's net income.
Pros and Cons of States With No Income Tax
There is no statewide sales or income tax in Alaska. For Alaskans, the state and local tax burden of 5.16% of personal income is the lowest of the 50 states, including income, property, sales, and excise taxes. Revenue and investment returns from mineral lease rents and royalties are distributed each year to all Alaskans by the Alaska Permanent Fund Corp.
However, the high expense of living in Alaska is primarily attributable to the state's remoteness. Alaska also has the nation's second-highest beer tax. If you're looking for a place to raise a family, this is one of the more affordable states. However, the healthcare prices in Alaska are among the highest and fastest-growing in the United States.
Snowbirds flock to this state because of its mild climate and many retirees. The overall tax burden in Florida is 6.82%, which is the sixth-lowest in the United States. Because of its higher-than-average cost of living and housing expenses, Florida ranks 35th in affordability, 10 points higher than Alaska.
According to the World Report's and U.S. News "Best States to Live in," Florida ranks 13th. Florida ranked third on the list of Southern states with the lowest education system expenditure in 2018. It received a C grade from the American Society of Civil Engineers (ASCE) in 2016. The Education Law Center gave Florida the same score for its state school money allocation last year.
Sales taxes on everything from groceries to clothing, sin taxes on booze and gambling, and taxes on casinos and hotels make up the bulk of Nevada's income stream. This means that Nevadans face an 8.39% tax burden from the state.
On this list, it has the greatest total tax burden, yet it still ranks 24th out of 50 states when compared to all states. Nevada is at the bottom (42) due to its high cost of living and housing in terms of affordability. U.S. News & World Report's "Best States to Live In" list ranks the state at 37th.
A C-grade was given to Nevada by the American Society of Civil Engineers at the same time. Furthermore, the Education Law Center ranked Nevada as the poorest state in the U.S. in terms of the fairness of its state school budget allocation in 2015. On this list, Nevada's healthcare costs are the lowest and the fourth lowest in the country.
Like many states that do not levy taxes, South Dakota relies on cigarette and alcohol taxes to generate money. The state has higher property taxes than the national average but lower sales tax rates than other states. It also has a tax-friendly environment for pensioners.
In addition to higher property tax rates, South Dakota's unique status as home to numerous large credit card businesses helps to keep the state's people income tax-free. South Dakotans pay only 7.86% of their personal income in taxes. This is according to WalletHub, ranking the state 11th in terms of the overall tax burden.
Although the state spent more money on education, it spent less than any other Midwestern state. The state's education funding allocation also got an F rating. Though the American Society of Civil Engineers hasn't given South Dakota a letter grade, its infrastructure is deteriorating, with 18.6% of bridges deemed structurally inadequate and 90 dams regarded to have high hazard potential.
As stipulated by the state constitution, Texas has no personal income taxes. Texas depends on hefty sales and uses taxes instead of income taxes. Overall sales taxes in certain areas might reach 8.25% when local taxes are included.
However, Texas depends on revenue from excise and sales taxes to pay for its infrastructure and services. Texas's property taxes are also among the highest in the nation. In reality, only a few states have greater property tax rates than the one we're talking about here. Consequently, Texas' property taxes are higher than most states of America.
Although Texas ranks 19th in the United States in terms of the total tax burden, Texans are still amongst the lowest-taxed residents. U.S. News & World Report placed Texas 38th for affordability, which is lower than the national average of 23rd. Per-pupil spending in Texas was the sixth-lowest among the 17 southern states in 2018, with the state receiving a D grade in 2015 for its school funding allocation.
As of 2017, it received a C- rating from the American Society of Civil Engineers (ASCE) for its infrastructure. In 2014, Texas spent the seventh-lowest amount on healthcare in the United States, according to the Centers for Medicare and Medicaid Services.
Only 15.9% of Washington's inhabitants are over the age of 65, and the absence of a state-mandated corporate income tax has resulted in a large number of important employers. Sales and excise taxes are high in Washington, and fuel costs are higher than in most other states.
With an overall estimated tax burden of 8.32%, the state ranks 22nd out of 50.
When it comes to affordability, Washingtonians are hurting from an extremely high cost of living and housing. Many people may not care since their state was named the finest place to live in America by U.S. News & World Report for 2019.
Although it had gotten a C grade for its allocation of school funds three years earlier, Washington State spent more per pupil than any other state in 2018. The American Society of Civil Engineers listed Washington with the same rating for its infrastructure in 2019.
Second, only to Alaska, Wyoming has an estimated population density of little over six persons per square mile, making it one of America's least populous states. State income taxes, retirement benefits taxes, and property and sales tax rates do not apply to the citizens of this state.
When it comes to taxes as a proportion of a person's gross domestic product (GDP), New Jersey ranks fourth in the U.S. Taxing natural resources is Wyoming's way of making up for the lack of a personal income tax. With an average placing of 28th in affordability and 31st on the list of "Best States to Live in" by U.S. News rates the state.
Compared to other western states, Wyoming was the second-highest spender on education in 2018. It was also the best at distributing school financing in 2015, earning an A+ overall score. Compared to other states, Wyoming's healthcare expenditure in 2014 was lower.
Even though Wyoming hasn't gotten an official letter grade for its infrastructure, the American Society of Civil Engineers reported that 9.9% of its bridges are structurally poor, and 99 of its dams have a high hazard risk.
What's the Purpose of State Taxes?
Immediately after the Constitution was signed, the government was given the power to tax its residents. In addition, each state kept the ability to levy whatever kind of tax it desired, barring those prohibited by both the United States Constitution and the state constitution. Taxes, fees, and other levies are the primary sources of revenue for the governments of these states.
States Exempt from Taxation of Retirement Distributions
Retirement payouts are not taxed in twelve states. 401(k), IRA, and pension payouts are not taxable in Illinois, Mississippi, and Pennsylvania. Only nine states do not impose any kind of state tax at all: All of the states in the lower 48 states of the United States of America and South Dakota. Alabama and Hawaii do not tax pensions, but they do tax payouts from 401(k) plans and IRAs.
What Do Income Tax-Free States Entail
Everyone wants to pay less in taxes. That might be done by moving to a place where there is no income tax. But don't think it's any simpler to live there than in your current location. Taxes on other people's property, such as sales or property taxes, are often used to make up for the lack of a state income tax.
According to a new study, a state's entire tax burden may be a better indicator of affordability than its income tax rate alone. A state's cost of living is influenced by a variety of variables, including healthcare and employment prospects.
No-tax jurisdictions confront many problems, yet some manage to balance low taxes, affordability, and the quality of life they provide. They're not alone. One thing is for certain: The low cost of living in any of the states discussed in this article is not adequately represented by the state's low taxes alone.
To obtain a first-hand understanding of what taxes are applicable to you in South Dakota, contact a professional in residency services.