Texas has no state income tax on wages or salaries
Texas does not charge a state income tax on what you earn from a job, a business, or investments. This is one of nine states with no income tax at all. If you live and work in Texas, you will not file a state income tax return or send money to the state based on your earnings.
The federal government still taxes your income — that does not change. You will still owe federal income tax, Social Security tax, and Medicare tax on your wages. But Texas itself takes nothing from your paycheck for state income tax.
This applies whether you are a resident, a non-resident who works in Texas, or someone who moved to Texas during the year. As long as you earned the money while living in Texas, the state does not tax it.
Key Takeaways
- Texas collects no state income tax on wages, salaries, business income, or investment gains.
- You still owe federal income tax, but that is separate from Texas state tax.
- Texas funds state services through sales tax, property tax, and business taxes instead of income tax.
- If you moved to Texas from another state, you may still owe income tax to your former state for the months you lived there.
- Retirees in Texas pay no state income tax on Social Security, pensions, or retirement account withdrawals.
How Texas pays for schools and roads without income tax
Texas makes up the lost income tax revenue through other sources. The state sales tax is 6.25 percent, and cities and counties add their own local sales taxes on top of that — bringing the total to between 8.25 and 8.875 percent depending on where you shop. Property taxes in Texas are also higher than in many other states, because schools and local governments rely on them heavily.
Texas also taxes businesses directly. The state charges a franchise tax on corporations and certain partnerships based on their revenue or profit. This is not an income tax, but it serves a similar purpose — it brings money into the state treasury.
The combination of these taxes — sales, property, and business taxes — funds public schools, highways, law enforcement, and other state services. Texas voters have chosen this mix instead of an income tax.
What happens if you moved to Texas from another state
If you moved to Texas partway through the year, you may still owe income tax to your former state for the months you lived there. Each state taxes income earned within its borders during the time you were a resident. When you move, your tax obligation to your old state ends on the date you leave.
You will report this on your federal return and on your former state's return. Most states have a form for part-year residents that asks what month you moved. You only report income earned before you left. Once you are a Texas resident, Texas does not tax that income, but your old state may.
If you worked remotely for a company in another state while living in Texas, the rules depend on where the company is based and where you performed the work. Some states tax remote workers who live out of state; others do not. Check with your former state's tax authority if you are unsure.
Social Security, pensions, and retirement income in Texas
Texas does not tax Social Security benefits, pension payments, or withdrawals from retirement accounts like 401(k)s and IRAs. This means retirees in Texas keep more of their retirement income than retirees in states with income tax.
The federal government may still tax some of your Social Security benefits depending on your total income, but Texas will not. Pension income, annuity payments, and distributions from retirement savings are also free from state tax in Texas.
This is one reason Texas is popular with retirees — the combination of no income tax and no tax on retirement income means lower overall state tax burden in retirement.
Self-employment and business income in Texas
If you are self-employed or own a business in Texas, you do not pay state income tax on your business profits. You still owe federal self-employment tax and federal income tax on that profit, but Texas takes nothing.
You may owe the state franchise tax if your business structure and revenue meet the threshold — currently businesses with more than $1.23 million in revenue. This is a tax on the business itself, not on your personal income from it. The franchise tax is much lower than an income tax would be.
Sole proprietors, partnerships, S-corporations, and LLCs all follow the same rule: no state income tax on business earnings, but possible franchise tax depending on size.
Federal taxes you still owe in Texas
Removing state income tax does not remove federal income tax. You will still file a federal return each year and pay federal tax on your income. The federal tax rate depends on your income level and filing status, and it applies the same way in Texas as it does everywhere else.
You will also pay federal payroll taxes — Social Security and Medicare — on wages. These come out of your paycheck automatically and are separate from income tax. Self-employed people pay both the employee and employer portion of these taxes.
Some people assume that living in a no-income-tax state means they pay no taxes at all. That is not true. You pay federal tax, sales tax, and property tax. The difference is that you do not pay a state income tax on top of those.
Frequently Asked Questions
Do I have to file a Texas state income tax return?
No. Texas does not have a state income tax return to file. You will file a federal return if you owe federal tax or are due a refund, but there is no separate Texas state return.
If I work in Texas but live in another state, do I owe Texas tax?
No. You owe income tax to the state where you live, not where you work. If you live in Oklahoma and work in Texas, you owe Oklahoma income tax on your wages. Texas does not tax non-residents on income earned in the state.
Does Texas tax capital gains or investment income?
No. Texas does not tax capital gains, dividends, or interest income. The federal government may tax these, but Texas does not. This applies to stocks, bonds, rental property sales, and other investments.
What if I inherited money or received a gift in Texas?
Texas does not tax inheritances or gifts. The federal government does not tax gifts either (though very large estates may owe federal estate tax). You can receive money in Texas without owing state tax on it.
Are there any deductions or credits I can claim on a Texas return?
There is no Texas state return to file, so there are no state deductions or credits to claim. You will claim deductions and credits on your federal return instead. Some people benefit from federal credits like the Earned Income Tax Credit or Child Tax Credit.