Texas has no state income tax on wages, salaries, or investment income

Texas does not levy a state income tax on individuals. You will not owe Texas state income tax on wages, self-employment income, dividends, capital gains, or interest. This applies whether you live in Texas full-time, work there, or moved there during the year. If you are a Texas resident, you file a federal return but no state return to the IRS.

This does not mean Texas has no state taxes at all. The state funds itself through sales tax, property tax, business taxes, and other levies. But for personal income — the largest tax most people pay — Texas residents have a significant advantage over residents of states with income tax.

Key Takeaways

  • Texas residents owe no state income tax on wages, self-employment, investments, or retirement withdrawals.
  • You still file a federal return; you straightforward do not file a Texas state return.
  • Texas funds state government through sales tax (which varies by city and county), property tax, and business taxes instead.
  • If you moved to Texas mid-year from another state, you may owe that state's income tax on income earned before you moved.
  • Retirement income, including Social Security and pension withdrawals, is not taxed by Texas.

How this affects your federal return

The absence of state income tax does not change your federal filing. You still file Form 1040 with the IRS and report all income — wages, self-employment, investment gains, and retirement distributions. Your federal tax liability is the same as someone in any other state.

Some taxpayers mistakenly think they can deduct state income tax they did not pay. You cannot. The federal deduction for state and local taxes (SALT) is capped at $10,000 per year, and it applies only to taxes you actually paid. Texas residents typically have lower SALT deductions than residents of high-tax states because they have no income tax to deduct — only property tax and sales tax, which are often smaller.

What taxes Texas does collect

Texas compensates for the lack of income tax through other revenue sources. Sales tax in Texas ranges from 8.25% to 8.875% depending on your city and county, and applies to most goods and some services. Property tax rates vary by county and school district but average around 0.8% of home value statewide — higher than the national average.

Texas also taxes businesses through the franchise tax (a gross receipts tax on businesses with revenue above a threshold) and collects excise taxes on fuel, cigarettes, and alcohol. These taxes affect you indirectly as a consumer and business owner, but they are not withheld from your paycheck the way income tax is in other states.

Moving to Texas mid-year from another state

If you moved to Texas partway through the year, you may owe income tax to your previous state on income earned before you moved. The state you left typically taxes you on income earned while you were a resident, even if you left before year-end.

You will need to file a part-year resident return in your former state, reporting only the income earned during the months you lived there. Texas will not tax that income, but your old state will. Keep documentation of your move date — a lease, utility bill, or driver's license change — to support the timing on your return. Some states offer credits for income tax paid to another state, which can reduce or eliminate double taxation, but the rules vary.

Retirement income and Social Security

Texas does not tax retirement distributions, pensions, or Social Security benefits. If you receive a 401(k) withdrawal, IRA distribution, pension payment, or Social Security check, none of it is subject to Texas state tax. This is a major advantage for retirees, especially those with substantial retirement savings.

Your federal tax obligations on retirement income remain unchanged. The IRS taxes most 401(k) and traditional IRA withdrawals as ordinary income, and Social Security may be partially taxable depending on your total income. But Texas adds nothing on top of that federal bill.

Self-employment and business income

If you are self-employed or own a business in Texas, you owe no state income tax on your net business income. You still file Schedule C with your federal return and pay federal self-employment tax (Social Security and Medicare), but Texas does not tax the profit.

You may, however, owe the Texas franchise tax if your business revenue exceeds $1.231 million in a year (the threshold changes annually). This is a tax on gross receipts, not net profit, and applies to most business structures. Sole proprietors, partnerships, S-corporations, and C-corporations all may be subject to it. Check with the Texas Comptroller of Public Accounts or a tax professional to determine whether your business crosses the threshold.

Why this matters for your tax planning

The lack of state income tax makes Texas attractive for high earners and retirees, but it should not be the only factor in a move. Property taxes in Texas are steep, and sales tax adds up over time. If you are considering relocating for tax reasons, compare your total state and local tax burden in both locations, not just income tax.

For those already in Texas, the absence of income tax simplifies your filing — you have one fewer return to prepare — and leaves more of your earnings in your pocket. If you are working with a tax professional, mention that you are a Texas resident so they do not waste time looking for state income tax deductions you cannot claim.

Frequently Asked Questions

Do I have to file a Texas state return?

No. Texas has no state income tax and no state income tax return. You file only your federal Form 1040 with the IRS. You may need to file other Texas forms if you own a business subject to the franchise tax, but there is no personal income tax return.

If I work in Texas but live in another state, do I owe Texas tax?

No. Texas does not tax income earned within the state by non-residents. You owe income tax only to the state where you live. However, your home state may tax your income even though you earned it in Texas, depending on that state's rules.

Are military pensions taxed by Texas?

No. Military retirement pay is not subject to Texas state income tax. Like all retirement income in Texas, it is exempt from state taxation, though it remains subject to federal income tax.

What if I inherit money while living in Texas?

Texas has no inheritance tax or estate tax. Inheritances are not taxed by the state. The federal government may tax large estates, but that is a separate matter from state tax.

Does Texas tax investment income like dividends and capital gains?

No. Texas does not tax dividends, interest, or capital gains. All investment income is free from Texas state tax. You still owe federal tax on investment income, but Texas adds nothing.