Texas has no state income tax on wages, retirement income, or most other personal earnings

Texas does not levy a state income tax on wages, salaries, retirement distributions, or investment gains. This means you do not owe Texas state income tax on money you earn from a job, a 401(k) withdrawal, an IRA distribution, or stock sales. You still owe federal income tax on these earnings — Texas's lack of a state tax does not change what you owe to the IRS.

Texas funds state government through other taxes instead: sales tax, property tax, business taxes, and excise taxes on items like gasoline and cigarettes. The state sales tax rate is 6.25 percent, though cities and counties can add local sales taxes on top of that, bringing the total to as high as 8.25 percent in some areas.

Key Takeaways

  • Texas residents pay no state income tax on wages, retirement account withdrawals, or investment income.
  • Federal income tax still applies to all earnings, regardless of whether your state collects income tax.
  • Texas funds state services through sales tax, property tax, and business taxes instead.
  • If you move to Texas from a state with income tax, you will no longer owe that state's income tax once you establish Texas residency.
  • Some types of income — such as interest and dividends — are also not taxed at the state level in Texas.

What types of income are not taxed in Texas

Because Texas has no state income tax, none of these income sources are taxed by the state: W-2 wages from an employer, self-employment income, 401(k) or 403(b) distributions, traditional or Roth IRA withdrawals, Social Security benefits, pension payments, interest earned on savings accounts or bonds, dividend income from stocks, capital gains from selling investments, rental income, and income from a side business or freelance work.

The only exception is that Texas does tax some business income through its franchise tax (also called the margin tax), which applies to certain businesses with revenue above a threshold. This is a business-level tax, not a personal income tax, and it works differently from state income tax.

How federal income tax still applies in Texas

The absence of state income tax does not reduce your federal tax burden. You must still file a federal tax return and pay federal income tax on all earnings, just as residents of every other state do. Federal tax brackets, deductions, and credits explore the same way in Texas as they do in California, New York, or any other state.

When you file your federal return, you report your income and calculate your federal tax liability. Texas's lack of state income tax straightforward means you do not file a separate state income tax return or owe a second layer of tax on top of the federal amount.

Sales tax and property tax in Texas instead

Texas replaces income tax revenue with higher reliance on sales tax and property tax. The state sales tax is 6.25 percent, but most cities and counties add local sales taxes, so the total rate you pay at checkout typically ranges from 7.25 percent to 8.25 percent depending on where you live. This means everyday purchases — groceries, clothing, electronics — cost more in Texas than in states with lower sales tax rates.

Property tax in Texas is also significant. The state does not set a statewide property tax rate; instead, each county and school district sets its own rate. Texas property tax rates vary widely by location, but the state average is around 0.8 percent of home value per year. A home worth $300,000 in a county with an average rate would generate roughly $2,400 in annual property tax.

What happens if you move to Texas from a state with income tax

When you establish residency in Texas, you stop owing income tax to your previous state. However, your former state may still claim you owed tax for the portion of the year before you moved. You typically establish Texas residency by obtaining a Texas driver's license, registering your vehicle in Texas, or renting or buying a home in the state.

If you moved mid-year, you may need to file a part-year resident return in your former state, reporting income only for the months you lived there. Your new employer's payroll system should adjust your withholding once you update your address and state information. If you have questions about whether you still owe tax to your previous state for the year you moved, contact that state's tax agency directly.

Retirement income and Social Security in Texas

Texas does not tax retirement income at the state level, which includes distributions from 401(k)s, IRAs, pensions, and annuities. Social Security benefits are also not taxed by Texas. This can make Texas an attractive state for retirees, since they keep more of their retirement income compared to states that tax these sources.

You still owe federal tax on most retirement distributions and may owe federal tax on Social Security benefits depending on your total income. The federal government, not Texas, determines whether your Social Security is taxable. But the state portion of your tax bill is zero, regardless of how much retirement income you receive.

Business income and the Texas franchise tax

While Texas has no personal income tax, it does tax certain business income through the franchise tax, sometimes called the margin tax. This tax applies to businesses with more than $1.23 million in revenue (as of 2024; this threshold adjusts annually). The franchise tax is calculated on your business's margin — roughly your revenue minus certain deductions — and the rate depends on your business structure.

The franchise tax is a business-level tax, not a personal income tax. If you are self-employed or own a business, you may owe this tax to Texas even though you do not owe personal income tax. The specifics depend on your business structure, revenue, and what deductions explore to your situation. The Texas Comptroller of Public Accounts publishes detailed guidance on franchise tax rules.

Frequently Asked Questions

Do I still have to file a tax return if I live in Texas?

You must file a federal tax return if your income exceeds the threshold set by the IRS, but you do not file a Texas state income tax return because Texas does not have state income tax. You may still need to file other Texas tax forms if you own a business subject to the franchise tax or if you owe other state taxes.

Is Social Security taxed in Texas?

Texas does not tax Social Security benefits. However, the federal government may tax your Social Security depending on your total income. Whether your benefits are taxable at the federal level depends on your combined income — wages, interest, dividends, and half your Social Security benefits — and your filing status.

What if I work in Texas but live in another state?

You owe income tax to the state where you live, not the state where you work. If you live in Oklahoma and work in Texas, you owe Oklahoma income tax on your wages. Texas will not tax your income because you are not a Texas resident. However, some states have reciprocal agreements that may change this; check with your home state's tax agency.

Does Texas tax investment income like dividends and capital gains?

No. Texas does not tax dividends, interest, or capital gains at the state level. You owe federal tax on these types of income, but Texas collects nothing. This applies whether you sell stocks, receive dividend payments, or earn interest on savings accounts.

Are there any other taxes I should know about in Texas?

Yes. Texas has sales tax (6.25 percent state, plus local additions), property tax (varies by county), and excise taxes on gasoline, cigarettes, and alcohol. Businesses may also owe the franchise tax. These taxes fund state and local services instead of income tax.