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 owe state income tax on money you earn from a job, self-employment, interest, dividends, or capital gains. This applies whether you live in Texas year-round, moved there recently, or work remotely for a Texas employer while living elsewhere.
The absence of state income tax does not mean Texas has no taxes at all. The state funds schools, highways, and services through sales tax, property tax, business taxes, and other revenue sources. But for individual wage earners, there is no state income tax return to file and no state income tax withheld from paychecks.
If you work in Texas but live in another state, you typically owe income tax only to your state of residence, not to Texas. If you live in Texas but work in another state, you may owe income tax to that state depending on its rules — but you will never owe Texas state income tax on those wages.
Key Takeaways
- Texas has no state income tax on wages, self-employment income, investment income, or retirement distributions.
- You do not file a Texas state income tax return and do not have state income tax withheld from your paycheck.
- You still owe federal income tax to the IRS, and you may owe income tax to another state if you work or live there.
- Texas funds state services through sales tax (currently 6.25 percent statewide), property tax, and business taxes instead.
What you still owe the federal government
Having no state income tax does not reduce what you owe the federal government. You must still file a federal income tax return with the IRS and pay federal income tax on your income. Your employer withholds federal tax from your paycheck separately from any state withholding.
If you are self-employed, you owe federal income tax and self-employment tax (Social Security and Medicare) to the IRS. Texas does not collect self-employment tax, but the federal government does. The absence of state income tax simply means you have one less tax return to file and one less withholding to track.
How Texas funds schools and services without income tax
Texas relies on sales tax as its largest source of state revenue. The statewide 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. Every purchase of goods and most services is subject to sales tax.
Property tax is the second major revenue source. Texas has no state property tax, but counties, cities, and school districts each set their own property tax rates. Property owners pay tax to their local jurisdiction, not to the state. School funding in Texas comes largely from local property taxes plus some state funding.
Texas also collects business taxes, franchise taxes, and taxes on specific industries like oil and gas. These are not income taxes but taxes on business activity and ownership. The state also receives federal funding for highways, Medicaid, and other programs.
If you moved to Texas from another state
When you move to Texas, you become a Texas resident for tax purposes once you establish residency — typically by obtaining a driver's license, registering to vote, or leasing or buying a home. From that point forward, you owe no state income tax to Texas on any income you earn.
You may still owe income tax to your previous state for income earned while you lived there during that tax year. If you moved mid-year, you file a part-year resident return with your old state for income earned before the move. Your new state (Texas) will not ask for any state income tax return.
Some states tax income earned within their borders even after you move away. If you worked in another state and then moved to Texas, check that state's rules — you may owe that state income tax on the wages you earned there, even though you now live in Texas and owe Texas nothing.
If you work in another state but live in Texas
If you live in Texas but work in a state with income tax, you typically owe income tax to that state on the wages you earn there. Your employer in that state may withhold state income tax from your paycheck. You would file a non-resident or part-year resident return with that state.
Texas will not tax your out-of-state wages. You file a federal return and a return in the state where you worked, but no Texas state return. Some states have reciprocal agreements that reduce or eliminate tax on wages earned by residents of neighboring states, so check the specific state's rules if you work near a border.
Self-employment income and business owners
If you are self-employed or own a business in Texas, you owe no Texas state income tax on your business income. You do owe federal self-employment tax and federal income tax on your net business income. You may also owe Texas franchise tax or other business-specific taxes depending on your business structure and revenue.
A sole proprietor, partnership, S-corporation, or LLC operating in Texas pays no state income tax on business profits. A C-corporation pays no state income tax either, though it may owe Texas franchise tax. The lack of state income tax is one reason many businesses choose to incorporate or operate in Texas.
Retirement income and investment income
Texas does not tax retirement income, including distributions from IRAs, 401(k)s, pensions, or annuities. You receive these payments without any Texas state withholding. You do owe federal income tax on most retirement distributions, and you must report them on your federal return.
Investment income — interest, dividends, and capital gains — is also not taxed by Texas. You owe no state tax on money you earn from stocks, bonds, rental property, or other investments. You do owe federal tax on investment income, and some types of investment income may trigger federal self-employment tax or alternative minimum tax.
Frequently Asked Questions
Do I have to file a Texas state income tax return?
No. Texas does not require a state income tax return because there is no state income tax. You file only a federal return with the IRS. If you worked in another state during the year, you may need to file a return in that state, but never in Texas.
Will my paycheck have Texas state tax withheld?
No. Your employer withholds only federal income tax, Social Security tax, and Medicare tax from your paycheck. There is no line for Texas state withholding because Texas collects no income tax. Your take-home pay is higher than it would be in a state with income tax.
What if I worked in Texas for part of the year and another state for part of the year?
You owe income tax to the state where you earned the income. If you earned wages in State A and then moved to Texas mid-year, you file a part-year resident return with State A for income earned there. Texas asks for nothing. File your federal return reporting all income from both states.
Does Texas have any tax on income at all?
Texas has no personal income tax, but it does tax businesses through franchise tax and other business-specific taxes. Individuals pay sales tax on purchases and property tax on real estate. These are the main ways Texas funds state services instead of using income tax.
If I retire in Texas, do I pay tax on my retirement income?
No state tax. You receive your pension, IRA distribution, or 401(k) withdrawal without any Texas withholding. You do owe federal income tax on most retirement income and must report it on your federal return. Some retirement income — like military pensions or certain teacher pensions — may be partially exempt from federal tax.