Texas has no state income tax, but collects revenue through sales tax and property tax instead

Texas does not tax wages, salaries, or investment income at the state level. This is one of the few states with a zero percent income tax. Instead, Texas funds state and local services through sales tax (a tax on purchases) and property tax (a tax on real estate and some personal property). If you work in Texas or receive income there, you will not owe state income tax on that money.

You will still owe federal income tax to the U.S. government. Federal tax rates depend on your income level and filing status, not on which state you live in. Texas's lack of state income tax does not change what you owe to the IRS.

Key Takeaways

  • Texas has no state income tax on wages, salaries, interest, dividends, or capital gains.
  • Texas sales tax starts at 6.25 percent at the state level, but cities and counties add local sales tax on top, making the total rate between 6.25 and 8.25 percent depending on location.
  • Property tax in Texas varies by county and school district; there is no statewide rate, and you can find your rate by contacting your county tax assessor.
  • Federal income tax still applies to Texas residents and is separate from state and local taxes.

How Texas sales tax works and where it varies

The state sales tax in Texas is 6.25 percent. This is the minimum you pay on most purchases. However, cities and counties can add their own local sales tax on top of the state rate. The total sales tax you pay depends on where you make the purchase.

Local sales tax additions range from 0 to 2 percent. This means the combined rate in your area could be as low as 6.25 percent or as high as 8.25 percent. For example, if you buy something in Austin, you pay 8.25 percent total (6.25 percent state plus 2 percent local). In some smaller towns, you might pay only 6.25 percent. To find the exact rate where you live or shop, contact your city or county tax office, or check the Texas Comptroller of Public Accounts website, which lists rates by location.

Sales tax applies to most goods, including clothing, electronics, and groceries in some cases. Certain items are exempt, such as prescription medications and some medical equipment. Services like haircuts or car repairs are generally not taxed in Texas.

Property tax rates and how to find yours

Texas has no statewide property tax rate. Instead, each county and school district sets its own rate based on local budget needs. This means your property tax bill depends entirely on where your property is located. A house worth the same amount in two different counties can have very different tax bills.

Property tax in Texas is calculated by multiplying your property's assessed value by the local tax rate, which is expressed as a percentage or as dollars per $100 of assessed value. For example, if your county's rate is 0.75 percent and your home is assessed at $300,000, your annual property tax would be $2,250 before any exemptions or adjustments.

To find your property tax rate, contact your county tax assessor-collector's office. They can tell you the exact rate for your property and explain any local variations. You can also find this information on your property tax bill or on your county's official website. Texas offers homestead exemptions that can lower the assessed value of your primary residence, which reduces your tax bill.

Federal income tax still applies to Texas residents

Even though Texas has no state income tax, you must still pay federal income tax on your earnings. Federal tax rates are set by the U.S. government and apply the same way in Texas as they do in every other state. Your federal tax bracket depends on your total income and filing status, not on where you live.

Federal income tax is withheld from paychecks by your employer and sent to the IRS. If you are self-employed or have income not subject to withholding, you may need to make quarterly estimated tax payments to the federal government. The fact that Texas does not tax your income does not reduce your federal obligation.

Who pays property tax and what it funds

Property tax in Texas is owed by anyone who owns real property — land, houses, commercial buildings, or other structures. The tax is paid annually, usually in two installments. If you have a mortgage, your lender may require you to pay property tax through an escrow account as part of your monthly payment.

Property tax revenue funds local schools, county government, city services, and special districts like water authorities. Because rates vary by location, areas with higher property values or greater service needs typically have higher tax rates. Texas allows certain groups to claim exemptions: homeowners can claim a homestead exemption on their primary residence, seniors may may have access to for additional exemptions, and disabled veterans may receive exemptions as well.

Business taxes and other state taxes in Texas

While Texas has no income tax, businesses do pay other state taxes. The main one is the franchise tax, which applies to most businesses operating in Texas. This is not an income tax but rather a tax on the privilege of doing business in the state. The rate and calculation method depend on the type of business and its revenue.

Texas also collects excise taxes on specific items like gasoline, cigarettes, and alcohol. These are added to the purchase price at the point of sale. Additionally, businesses may owe sales tax on goods they purchase for resale, and they must collect and remit sales tax on sales to customers.

Frequently Asked Questions

Do I have to pay state income tax if I work in Texas but live in another state?

No. Texas has no state income tax, so you will not owe Texas income tax on wages earned there, regardless of where you live. However, your home state may tax your income depending on its laws. You should check with your state of residence about its income tax requirements.

Are groceries taxed in Texas?

Most unprepared groceries are not taxed in Texas. This includes items like raw meat, produce, bread, and milk. However, prepared foods, restaurant meals, and certain items like candy and soft drinks are subject to sales tax. Check your receipt or ask the cashier if you are unsure about a specific item.

Can I deduct property tax from my federal income tax?

You may be able to deduct state and local property taxes on your federal return, but only if you itemize deductions instead of taking the standard deduction. The total deduction for all state and local taxes combined is capped at $10,000 per year. Consult a tax professional to determine whether itemizing benefits your situation.

What is the franchise tax, and do I have to pay it?

The franchise tax is a state tax on businesses operating in Texas. Most businesses with revenue above a certain threshold must pay it. The rate and threshold depend on your business structure and type. You can find details on the Texas Comptroller of Public Accounts website or contact a tax professional to determine if your business owes this tax.

How often do property tax rates change in Texas?

Property tax rates are set annually by each county and school district based on their budgets. Rates can change year to year, and you will receive notice of any changes on your property tax bill. Your assessed property value can also change annually, which affects your total tax bill even if the rate stays the same.