Texas does not have a state income tax
Texas is one of nine states that does not tax wages, salaries, or investment income at the state level. You will not owe Texas state income tax on money you earn, regardless of whether you work for an employer, run your own business, or live off investment returns. This applies to everyone who lives and works in Texas, including residents who moved there from other states.
The absence of state income tax does not mean Texas collects no state revenue. The state funds schools, roads, and services through sales tax, property tax, business taxes, and other sources. Texas has a 6.25 percent state sales tax, though individual cities and counties can add local sales taxes on top of that rate. Property taxes in Texas are among the highest in the nation by percentage of home value, which is how the state replaces the revenue it does not collect from income.
If you work in Texas but live in another state, you still owe no Texas income tax. If you live in Texas but work in another state, you may owe income tax to that other state, depending on its rules and any reciprocal agreements in place.
Key Takeaways
- Texas residents and workers pay no state income tax on wages, self-employment income, or investment gains.
- Texas funds state services through sales tax, property tax, and business taxes instead of income tax.
- The state sales tax is 6.25 percent, but cities and counties can add local sales taxes that raise the total rate.
- If you work in Texas but live elsewhere, you do not owe Texas income tax; if you live in Texas but work out of state, you may owe tax to that other state.
How Texas replaced income tax revenue
When Texas chose not to implement a state income tax, it had to fund government operations through other means. The state relies most heavily on sales tax and property tax. Texas also collects a franchise tax on businesses, which is a tax on the privilege of doing business in the state rather than a tax on profits.
Sales tax in Texas starts at 6.25 percent at the state level. Most cities and counties add their own local sales tax on top of that. The combined rate varies by location — some areas have a total sales tax of 8 percent or higher. This means that when you buy goods or services in Texas, the tax you pay at checkout includes both state and local portions.
Property tax is the other major revenue source. Texas has no state property tax, but counties and school districts set their own rates. Property tax bills in Texas are often higher than in states with income tax, because the state depends on property owners to fund schools and local services. The effective property tax rate varies significantly by county.
What you still file with the federal government
The fact that Texas has no state income tax does not change your federal tax obligations. You must still file a federal income tax return with the Internal Revenue Service if your income exceeds the filing threshold for your age and filing status. The federal government taxes income regardless of which state you live in.
When you file your federal return, you report all income from all sources — wages, self-employment, investments, rental property, and anything else taxable at the federal level. You can deduct state and local taxes paid, including Texas sales tax and property tax, up to a combined limit of $10,000 per year on your federal return. This deduction may reduce your federal tax bill.
Self-employment and business income in Texas
If you are self-employed or own a business in Texas, you owe no Texas state income tax on your business profits. However, you still owe federal self-employment tax and federal income tax on that income. You also must pay the Texas franchise tax if your business meets the threshold — generally, businesses with more than $1.23 million in revenue owe this tax, though the exact threshold and rate depend on the type of business.
Self-employed people in Texas benefit from the lack of state income tax, but they still face the same federal obligations as self-employed people everywhere. You must make quarterly estimated tax payments to the federal government if you expect to owe $1,000 or more in federal tax for the year. Texas does not require estimated state tax payments because there is no state income tax to estimate.
Moving to or from Texas and your tax situation
If you move to Texas from another state, you stop owing that state's income tax once you establish Texas residency. Most states consider you a resident once you move there with the intent to stay, though some have specific rules about how long you must be present or what ties you must have to the state. You should notify your former state's tax authority of your move, especially if you moved partway through the tax year.
If you move away from Texas to a state with income tax, you will owe that new state's income tax on income earned while you are a resident there. Some states tax you based on where you earned the income rather than where you live, so the rules vary. You may also owe taxes to your former state on income earned before you left, depending on when you moved during the tax year.
If you work remotely for a Texas company but live in another state, you typically owe income tax to the state where you live and work, not to Texas. However, some states have reciprocal agreements or special rules for remote workers, so you should check the rules in your specific state.
Retirement income and investment income in Texas
Texas does not tax retirement income, including distributions from IRAs, 401(k) plans, pensions, or annuities. If you are retired and living in Texas, you owe no state income tax on these sources of income. This applies whether the retirement account was opened in Texas or in another state.
Investment income — including dividends, capital gains, and interest — is also not taxed by Texas. If you sell stocks, bonds, or real estate at a profit, you owe federal capital gains tax but no Texas state tax. This is true even if you held the investment for only a short time or made a large gain.
You still owe federal tax on all retirement and investment income. The federal government taxes long-term capital gains at preferential rates (0 percent, 15 percent, or 20 percent depending on your income), and short-term gains at your ordinary income tax rate. may have access to dividends also receive preferential federal rates. Texas adds no additional layer of tax on top of the federal obligation.
Frequently Asked Questions
Do I have to file a Texas state income tax return?
No. Texas does not have a state income tax, so there is no Texas state income tax return to file. You only file a federal return with the IRS. You may need to file other Texas tax forms if you own a business or property, but these are not income tax returns.
If I work in another state but live in Texas, do I owe that state income tax?
Yes, typically. Most states tax you based on where you earn the income, not where you live. If you work in a state with income tax, you usually owe that state's tax on the income you earned there, even though you live in Texas. Some states have reciprocal agreements that change this rule, so check with the state where you work.
Does Texas tax Social Security benefits?
No. Texas does not tax Social Security benefits. The federal government may tax a portion of your benefits depending on your total income, but Texas adds no tax. If you receive only Social Security and live in Texas, you owe no state income tax on those benefits.
What if I lived in Texas for part of the year and another state for part of the year?
You owe Texas no income tax for the months you lived there. For the months you lived in another state, you owe that state's income tax on income earned during that period. You may need to file part-year resident returns in both states, or file a full-year return in the state where you spent more time. The rules vary by state.
Are there any Texas taxes I do pay as a resident?
Yes. You pay Texas sales tax when you buy goods and services. You pay property tax if you own real estate. If you own a business, you may pay the Texas franchise tax. You also pay federal income tax, federal payroll taxes, and any local taxes in your city or county. Texas straightforward does not add a state income tax on top of these.