Texas stands out when it comes to taxes. People thinking about moving to Texas—or just curious residents—often ask if Texas taxes their income. Here's the definitive answer and what it means for your wallet.
Texas has no personal state income tax. Yes, you read that right—zero state tax on wages, investments, retirement income, or Social Security benefits.
Photo by Mark Youso
No State Income Tax: What It Actually Means
Texas is among eight states that don't tax individual income. Residents never file a state income tax return. You only file with the IRS each April for federal taxes.
Key points:
- No tax on salary, tips, or bonuses.
- No state tax on retirement distributions or pensions.
- Investment gains—like stocks or real estate sales—aren’t taxed by Texas.
- No state tax on military or Social Security benefits.
This policy draws in retirees, business owners, and people with investment income. It also keeps things simple at tax time—no extra state paperwork, no deductions or credits to track.
Why Does Texas Skip Income Tax?
The state decided long ago to fund its operations with other revenue sources. Instead of taxing paychecks, Texas relies more on property taxes and sales taxes to pay for schools, roads, health care, and public safety.
So, who still pays income tax in Texas?
- Nobody—unless you live or work in another state that taxes your income, or your work location changes to one that does.
Texas Business Taxes: What About Companies?
While Texas skips traditional corporate income tax, it does levy a state gross receipts tax, known as the Texas franchise tax. This applies to most businesses but not to personal income.
In short:
- No personal income tax for individuals.
- Businesses pay a special gross receipts tax, not a corporate income tax.
What Taxes Do Texans Actually Pay?
No income tax doesn't mean no taxes at all. Texas gets its revenue in other ways—and sometimes, it's more expensive for homeowners and shoppers.
Property Taxes: Higher Than the National Average
Texans pay some of the highest property taxes in the country. The state average is about 1.47% of your home’s value per year, but rates swing wildly depending on your county.
For example:
- In King County, the median annual property tax is about $513.
- In Collin County, it jumps to $7,202.
Local governments—think school districts and city councils—set their own rates, so the amount you pay can change sharply from place to place.
Are there ways to save?
Texas offers homestead exemptions and special breaks for seniors and disabled veterans. Homeowners age 65+ or with disabilities can take a $100,000 homestead exemption, with even more possible in certain counties.
Sales Taxes: Pay More at the Register
Texas has a base sales tax of 6.25%. Cities and counties can add up to 2% more, which bumps the rate in many places to around 8.2%.
What gets taxed?
- Most physical goods
- Some services
Exemptions:
Most groceries, prescription medicines, and some medical supplies are not taxed, but prepared food at restaurants is. Alcohol and fuel have special excise taxes, for example, 20 cents per gallon for gasoline and diesel.
No Estate or Inheritance Tax
Another perk: Texas doesn't tax estates or inheritances. If you’re planning your legacy, this can mean big savings for your heirs compared to some other states.
Moving to Texas: Residency and Tax Benefits
To take advantage of Texas’s no-income-tax rule, you must be a resident—meaning your primary home and life are in the state. This includes spending most of the year in Texas and updating your official address.
Generally, Texans:
- Pay no state income tax
- File only federal returns each spring
- Need to budget for higher property and sales taxes
People with remote jobs or multiple homes should double-check where they're classified as residents, since another state might still want to tax their income.
Payroll and Withholding: What Workers See
If you’re employed in Texas, there’s no state income tax withheld from your paycheck. Your company just withholds federal taxes, Social Security, and Medicare.
Employees with Texas-based jobs and addresses don't see "state withholding" lines on their paystubs.
If your employer's HR department asks you to fill out a state tax form, it's only for people living or working outside Texas.
Pros and Cons: Texas Taxes in Perspective
Pros:
- No state tax on individual or retirement income
- No estate or inheritance tax
- Straightforward tax returns—no state paperwork
Cons:
- High property taxes, especially for homeowners
- Sales tax on most goods and services adds up
- Some localities have higher tax rates than others
Bottom line:
You might save big on income tax but pay more in other taxes, especially if you own property or shop often.
Conclusion: Is Texas Right for You?
Texas delivers on its no-income-tax promise. For many, the savings make a real difference. But residents need to weigh those benefits against high property taxes and steep sales tax rates. Texas keeps taxes simple but shifts more cost to what you own and buy.
If you're planning a move, do the math on all taxes to see if the Lone Star State gives you the best deal for your lifestyle.
Want more tips? Explore local tax rates and property breaks before making the leap. Texas might be the tax-friendly home you’ve wished for—if you know where to look.