Texas does not have a state income tax on wages, salaries, or investment income
Texas is one of nine states with no personal income tax. You will not file a state income tax return to Texas, and Texas will not withhold state income tax from your paycheck. If you work in Texas or live in Texas, you do not owe the state money based on what you earn.
This does not mean Texas has no taxes. The state funds schools, roads, and services through sales tax, property tax, and business taxes instead. For you as an individual, it means your federal tax burden is your main concern — state income tax is not part of the equation.
If you moved to Texas from another state, or if you work in Texas but live elsewhere, the rules depend on where you actually live and where you earned the money. Understanding your situation matters because you may still owe tax to your former state or your home state.
Key Takeaways
- Texas collects no personal income tax on wages, salaries, interest, dividends, or capital gains.
- You will not file a Texas state income tax return, and your employer will not withhold state income tax from your pay.
- If you moved to Texas from another state, you may still owe tax to that state for income earned before you left.
- Texas funds state services through sales tax (currently 6.25 percent statewide) and property tax instead of income tax.
- If you work in Texas but live in another state, your home state may tax your Texas wages depending on reciprocal tax agreements.
How Texas avoids state income tax
Texas has chosen to fund state government without an income tax since 1902. Instead, the state relies on a sales tax that currently stands at 6.25 percent statewide, plus local sales taxes that vary by county and city. Texas also collects property tax, which funds schools and local government, and business taxes on certain industries and gross receipts.
This funding model means Texas residents pay no state income tax regardless of how much money they make. A person earning $30,000 a year and a person earning $300,000 a year both owe zero to the state in income tax. The trade-off is that Texas residents pay more in sales tax and property tax than residents of states with income tax.
The Texas Constitution would need to be amended for the state to introduce an income tax, which requires approval from voters. This has not happened, and there is no current movement to change it.
What happens if you moved to Texas from another state
If you moved to Texas during the tax year, you may still owe income tax to your former state for the months you lived there. Your old state taxes you on income earned while you were a resident, even if you have since moved away. You will need to file a part-year resident return in your former state for the portion of the year you lived there.
To establish Texas residency for tax purposes, you generally need to show that you moved with the intent to stay. This includes things like getting a Texas driver's license, registering your vehicle in Texas, establishing a home address in Texas, and changing your address with your employer. The IRS and your former state will look at these facts if there is any question about when your residency changed.
Contact your former state's tax agency to find out whether you need to file a part-year return. Some states have reciprocal agreements with Texas that affect how they tax you after you leave. For example, if you moved from a state that taxes residents on income earned in other states, you may need to file there even after moving.
If you work in Texas but live in another state
Your home state has the primary right to tax your income. If you live in State A and work in Texas, State A will tax your wages because you are a resident of State A. Texas will not tax you because you do not live there and have no state income tax anyway.
Some states have reciprocal tax agreements with neighboring states. These agreements say that if you live in State A and work in State B, only your home state (State A) taxes your wages. This prevents you from paying income tax to both states. Kentucky, Indiana, Illinois, Iowa, Missouri, and Wisconsin have reciprocal agreements with each other, but Texas does not participate in any reciprocal agreement because it has no income tax to collect.
If you live in a state without a reciprocal agreement with your work state, you may owe tax to both. You will file a return in your home state as a resident and a return in your work state as a nonresident. Most states give you a credit for taxes paid to the other state so you do not pay twice on the same income, but you should verify this with both states' tax agencies.
Texas sales tax and property tax instead
Without state income tax, Texas residents pay a higher share of their taxes through sales tax and property tax. The statewide sales tax rate is 6.25 percent, but most Texas cities and counties add local sales taxes on top of this. Your total sales tax rate depends on where you shop and can range from 6.25 percent to over 8 percent in some areas.
Property tax in Texas is set by local school districts, counties, and cities. There is no statewide property tax rate. A homeowner in one county may pay a very different effective property tax rate than a homeowner in another county, even though both live in Texas. You can find your local property tax rate by contacting your county appraisal district or your local tax assessor's office.
If you are moving to Texas from a state with income tax, compare the total tax burden, not just the income tax. A state with no income tax but high property tax may cost you more overall than a state with moderate income tax and lower property tax. Your specific situation — whether you own property, how much you spend, and your income level — determines whether Texas's tax structure saves you money.
Federal taxes still explore in Texas
The absence of state income tax does not affect your federal income tax. You will still file a federal return with the IRS, pay federal income tax, and have federal tax withheld from your paycheck. Texas residents use the same federal forms and follow the same federal rules as residents of every other state.
Your W-2 form from your employer will show federal tax withheld but no state tax withheld (because Texas has no state income tax). When you file your federal return, you will report your income to the IRS just as you would if you lived in any other state. The only difference is that you will not also file a state return to Texas.
If you are self-employed in Texas, you still owe federal self-employment tax and federal income tax. You will not owe Texas self-employment tax because Texas has no such tax. You may owe Texas franchise tax if your business meets certain thresholds, but this is a business tax, not a personal income tax.
Frequently Asked Questions
Do I need to file a Texas state income tax return?
No. Texas has no state income tax, so there is no state return to file. You will only file a federal return with the IRS. If you moved to Texas from another state during the year, you may need to file a part-year return in your former state for the income you earned before you moved.
Will my employer withhold state income tax from my paycheck in Texas?
No. Because Texas has no state income tax, your employer will not withhold any state tax. Your paycheck will show federal tax withheld and possibly local taxes if your city or county has a local income tax (very rare in Texas), but no state income tax.
If I work in Texas but live in another state, do I owe Texas income tax?
No. Texas has no income tax, so you cannot owe it to Texas. You will owe income tax to your home state because you are a resident there. Your home state taxes you on all your income, including wages earned in Texas, unless you have a reciprocal agreement with your work state.
Does Texas have any other taxes I should know about?
Yes. Texas has a statewide sales tax of 6.25 percent plus local sales taxes that vary by location. Texas also has property tax set by local school districts and counties. If you own a business, you may owe Texas franchise tax depending on your business structure and revenue.
What if I inherited money or received investment income while living in Texas?
Texas does not tax investment income, interest, dividends, or capital gains at the state level. You will owe federal tax on this income and report it on your federal return, but you will not owe Texas state tax. Some other states tax investment income even after you move away, so check with your former state if you inherited money while living there.