Why are Midwestern States considered the best for tax planning?
The Midwest is considered better for tax planning by many individuals, families, and businesses — especially when compared to coastal or high-tax states — for several practical reasons.
1. Generally Lower Taxes Across the Board
While not all Midwestern states are the same, many offer lower taxes in key categories:
| Tax Type | Why It’s Better in the Midwest |
|---|---|
| Income Tax | Many Midwestern states have flat or relatively low income tax rates. Some (like South Dakota) have no state income tax at all. |
| Property Tax | Property taxes are often lower than the national average, especially when compared to the Northeast or West Coast. |
| Sales Tax | In several states, the combined state + local sales tax rates are lower than in places like California or New York. |
| Estate/Inheritance Tax | Fewer Midwestern states impose these taxes — and those that do often have higher exemption thresholds. |
2. Business-Friendly Environment
Many Midwestern states are known for:
- Low or no corporate income taxes(e.g., South Dakota)
- Affordable cost of doing business
- Favorable LLC and trust laws (especially in South Dakota and Missouri)
- Less regulation and red tape than in larger coastal states
Makes the Midwest ideal for entrepreneurs, real estate investors, and family businesses.
3. Retiree-Friendly Tax Planning
Several Midwestern states offer tax breaks for retirees, such as:
- No tax on Social Security (e.g., Indiana, Illinois, Michigan)
- Partial or full exemptions on retirement income (e.g., Iowa, Missouri)
- Low cost of living, allowing retirement funds to go further
4. Affordable Real Estate = Better Asset Planning
- Lower housing costs mean lower property taxes and more flexibility in estate or trust planning
- Easier to hold real estate in LLCs or family trusts without triggering high tax burdens
5. Trust & Asset Protection Laws
States like South Dakota and Missouri are known for nation-leading trust laws, including:
- Dynasty Trusts: long-term wealth transfer with no estate tax
- Asset Protection Trust: shield assets from creditors
- Privacy Protections: favorable tax treatment for trust income
6. Strategic Planning Advantages
The Midwest can offer strategic advantages for:
- Income Shifting (to states with flat or no income taxes)
- Gifting and estate freezing strategies
- Multistate business planning (especially for online or remote businesses)
For Example:
An Illinois resident might set up a South Dakota trust to take advantage of favorable tax and privacy laws.
A business owner in Minnesota might register an LLC in Iowa for lower fees and fewer compliance hurdles.
Comparison: Midwest vs. High-Tax States
| Category | Midwest (e.g., South Dakota, Missouri, Indiana) | High-Tax States (e.g., CA, NY, NJ) |
|---|---|---|
| State Income Tax | 0–5% (many flat or low) | 8–13% (progressive) |
| Property Tax | Lower, esp. outside urban cores | High, especially in metro areas |
| Corporate Tax | Low or none (e.g., SD, IN) | High, with complex compliance |
| Estate/Inheritance Tax | Rare | Common |
| Cost of Living | Low to moderate | Very high |
| Real Estate Prices | Affordable | Expensive |
Not All Midwest States Are Equal
Some Midwestern states (like Minnesota or Illinois) have higher taxes, including:
- Progressive income taxes
- Higher property tax rates
- Estate taxes (Minnesota)
So tax planning within the Midwest still requires picking the right state based on your goals.
The Bottom Line.....The Midwest is better for tax planning because of:
- Lower income and property taxes
- Business-friendly laws and costs
- Excellent trust and asset protection jurisdictions (South Dakota)
- Retiree benefits and wealth transfer advantages
- Cost-effective real estate for planning and investing