Texas has no state income tax on wages, salaries, or most other personal income
Texas is one of nine states that does not collect income tax from residents on wages, salaries, investment gains, or retirement distributions. If you work in Texas or live there, you will not owe state income tax on your paycheck. The state funds itself instead through sales tax, property tax, and business taxes.
This does not mean you owe nothing to the state. Texas has a sales tax that ranges from 8.25% to 8.875% depending on your location, and property tax rates vary by county and school district. If you are self-employed or own a business, you may owe Texas franchise tax or other business-related taxes.
You will still owe federal income tax to the IRS, regardless of where you live. Texas's lack of state income tax does not change your federal filing requirements.
Key Takeaways
- Texas residents pay no state income tax on wages, salaries, investment income, or retirement withdrawals.
- Texas funds state operations through sales tax (8.25% to 8.875%), property tax, and business taxes instead.
- Federal income tax is still required; state income tax status does not affect what you owe the IRS.
- Self-employed individuals and business owners may owe Texas franchise tax or other state business taxes.
- Moving to Texas or working remotely for a Texas employer does not eliminate your federal tax obligations.
How Texas replaced income tax revenue
When Texas chose not to impose income tax, the state needed other sources of revenue. Sales tax became the primary replacement. Every purchase of goods and most services in Texas is subject to sales tax, which the state splits with local governments and school districts.
Property tax is the second major revenue source. Texas homeowners and commercial property owners pay property tax to their county and school district. These rates vary significantly by location—some counties charge under 0.5% of property value annually, while others charge closer to 2%. Property tax in Texas is often higher than in states with income tax, which is one trade-off residents make.
Business taxes round out the state's revenue. The Texas franchise tax applies to most businesses with revenue over a certain threshold, and the state also collects taxes on oil and gas extraction, insurance premiums, and other business activities.
What types of income are not taxed in Texas
Texas does not tax wages and salaries from any employer, whether you work full-time, part-time, or as a contractor. You will see no state income tax withheld from your paycheck.
Investment income is also untaxed at the state level. This includes capital gains (profit from selling stocks, real estate, or other assets), dividends, and interest from savings accounts or bonds. If you sell a rental property or investment property in Texas, you owe no state tax on the gain.
Retirement distributions are not taxed by Texas either. Withdrawals from 401(k)s, IRAs, pensions, and annuities are free from state income tax. Social Security benefits are also not taxed by the state.
Self-employment income from a sole proprietorship or partnership is not subject to state income tax, though you may owe the franchise tax if your business revenue exceeds the threshold (currently $1.23 million for most businesses).
Federal income tax still applies to Texas residents
The absence of state income tax does not change your federal obligations. You must file a federal tax return with the IRS if your income exceeds the federal threshold for your filing status. For 2024, a single person with over $14,600 in income must file; the threshold is higher for married couples and dependents.
Federal tax withholding appears on your paycheck as a separate line item from state withholding. In Texas, you will see only federal withholding (and Social Security and Medicare taxes), but no state income tax line.
If you work remotely for an out-of-state employer while living in Texas, you still owe federal tax. You do not owe income tax to the state where your employer is located—you owe it to Texas (which is zero) and to the federal government.
Sales tax and property tax as the real cost
While Texas residents avoid income tax, they typically pay more in sales tax and property tax than residents of income-tax states. The combined state and local sales tax in Texas ranges from 8.25% to 8.875%, which is applied to most retail purchases and many services.
Property tax is where the difference becomes most visible. A homeowner in Texas with a $300,000 house might pay $3,000 to $6,000 per year in property tax, depending on the county and school district. Over a 30-year mortgage, this adds up significantly. Renters do not pay property tax directly, but landlords often pass the cost along through higher rent.
For high-income earners, the lack of state income tax can still result in lower overall taxes compared to high-tax states like California or New York. For lower-income households, the sales tax and property tax burden may be proportionally higher.
Self-employed and business owner taxes in Texas
If you are self-employed or own a business, you do not owe Texas state income tax on your business profits. However, you may owe the Texas franchise tax if your business revenue exceeds $1.23 million in a year. The franchise tax rate is either 0.375% or 0.75% of revenue, depending on your business structure and income level.
Sole proprietors and partners in partnerships report business income on their personal federal tax return and pay federal self-employment tax (Social Security and Medicare), but no state income tax. Corporations and limited liability companies (LLCs) may owe franchise tax if they meet the revenue threshold.
You are still responsible for collecting and remitting sales tax on taxable goods and services you sell in Texas. This is separate from income tax and is owed to the state regardless of your business structure.
Moving to or working in Texas for tax reasons
Some people relocate to Texas specifically to avoid state income tax, particularly high earners and retirees. If you move to Texas and establish residency, you will not owe state income tax on income earned after you become a resident. However, if you earned income in another state before moving, you may still owe that state's income tax on income earned while you lived there.
Establishing Texas residency typically requires obtaining a Texas driver's license, registering your vehicle in Texas, and establishing a permanent home address in the state. The IRS and other states may scrutinize moves that appear designed solely for tax avoidance, so document your move carefully if you are relocating.
If you work remotely for a company based in another state but live in Texas, you owe no income tax to that state. You owe federal tax and Texas tax (which is zero). Your employer should withhold based on your state of residence, not their location.
Frequently Asked Questions
Do I still have to file taxes if I live in Texas?
Yes, you must file a federal tax return with the IRS if your income exceeds the federal threshold for your filing status. Texas has no state return to file, but federal filing is required regardless of where you live. Self-employed individuals must file even if their income is below the threshold.
Is Social Security taxed in Texas?
No. Texas does not tax Social Security benefits. However, the federal government may tax a portion of your benefits depending on your total income and filing status. Check your federal tax situation, not your state situation, to determine if Social Security is taxable to you.
What if I work in Texas but live in another state?
You owe income tax to the state where you live, not where you work. If you live in a state with income tax and work in Texas, you file a return in your home state. Texas will not tax your income because you are not a resident. Your employer should withhold based on your state of residence.
Does Texas tax retirement income like pensions or 401(k) withdrawals?
No. Texas does not tax distributions from 401(k)s, IRAs, pensions, or annuities. This applies to all retirees living in Texas, regardless of where they earned the money. Federal tax may still explore depending on your total income and filing status.
If I own rental property in Texas, do I owe state income tax on the rent?
No. Rental income is not subject to Texas state income tax. You do not owe state tax on the rent you collect or on capital gains if you sell the property. You will owe federal income tax on rental income and any gains, and you must pay property tax on the property itself.