Taxes in Texas—A State Tax Profile

Texas is pretty tax-friendly, compared to other states

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Texas is one of only seven states that have no personal income tax. Most of the taxes in Texas are sales taxes, as well as taxes on businesses and specific industries.

Texas does have a property tax, but it's collected by cities, counties, and school districts, not by the state itself. The revenue it produces can only be used for local needs. 

Texas is rather tax-friendly overall. According to the World Population Review, its overall state and local tax burden ranked 33rd among all states in 2020. The tax burden came in at just 8.18%. Compare that to New York, which came in first, at 12.97%, in 2020.

In 2021, New York increased its top tax rate from 8.82% to three graduated rates of 9.65%, 10.30%, and 10.90%, increasing the overall tax burden in the state. All of these rates apply to incomes over $2 million.

The Tax Foundation ranks Texas even better according to its own criteria. It assigns the state a tax burden of just 7.6%, ranking it 46th among all states.

The Texas Franchise Tax

Texas has no individual income tax as of 2021, but it does levy a franchise tax of 0.375% on some wholesalers and retail businesses. The rate increases to 0.75% for other non-exempt businesses. Also called a "privilege tax," this type of income tax is based on total business revenues exceeding $1.18 million.

Sole proprietorships and some general partnerships are exempt from the franchise tax.

Franchise tax reports are due annually on May 15 or the next business day when this date falls on a weekend or a holiday. Interest on past-due franchise debts begins accruing 61 days after the due date, and penalties of up to 10% can apply after 30 days.

"Death Taxes" in Texas

Inheritance and estate taxes are often grouped under the label "death taxes."

Texas repealed its inheritance tax on September 15, 2015. There's no estate tax in Texas, either, although estates valued at more than $11.7 million can be taxed at the federal level as of 2021. 

Property Taxes in Texas

Property taxes are based on the assessed current market value of real estate and income-producing tangible personal property.

"Income" is the key word when it comes to personal property. Your vehicle might be considered tangible personal property, but it's not subject to a tax as long as you never use it to earn a living. Driving it back and forth to your place of employment is okay.

For real estate, appraisals are performed by county districts. The appraiser will compare your home to other similar homes that have recently sold in the area, and it will determine the value from there.

The appraised value of your real estate is then multiplied by the local tax rate to determine your tax bill. These rates are set by counties and school districts. They're based on yearly budgets and how much revenue the districts need to cover their costs.

Local governments regularly hold public hearings to discuss tax increases, and citizens of Texas can petition for a public vote on an increase if it exceeds certain limits. 

Owners of agricultural or timberland property can apply for special appraisals based on the value of crops, livestock, and timber produced by the land. This can result in lower appraisals and lower taxes. 

Texas Property Tax Exemptions

Property tax exemptions reduce the appraised value of your real estate, which can in turn reduce your tax bill. For example, a tax rate of 1.8% applied to an appraised value of $200,000 works out to more than 1.8% of an appraised $175,000 value—it's a difference of $450.

Texas has several exemptions available.

The Homestead Exemption

You can qualify for a $25,000 reduction in your home's appraised value if it's your principal place of residence as of January 1 of the tax year. The Texas State Code allows school districts the option of offering a separate exemption of up to 20% of the appraised value. This local exemption can't be less than $5,000.

Exemptions for Seniors and the Disabled

Homeowners who are age 65 or older, or those who are disabled, can qualify for an additional $10,000 exemption for school district taxes and an exemption for other local property taxes that can't be less than $3,000.

The school district can't tax any more than what homeowners paid in the first year they qualified, so the tax is effectively frozen. Widows or widowers age 55 or older whose deceased spouse qualified for the 65-or-older exemption can continue to receive the exemption themselves if they apply.

Exemption for Disabled Veterans

Veterans of the U.S. Armed Forces who have been disabled as a result of their service might be eligible for a very generous disabled veteran's exemption. This exemption is equal to 100% of the appraised value of their primary residence.  

Texas also offers a property tax exemption for solar- or wind-powered energy devices, as well as several exemptions for charitable organizations and businesses.

Sales Taxes in Texas

Texas's state-level sales tax is 6.25%. Localities can add their own sales taxes on top of this, however, which can bring the rate up to as much as 8.25% in some areas.

Unprepared food, prescription drugs, and over-the-counter drugs are exempt from sales tax.

The state offers sales tax "holidays" each year. Certain purchases are exempt from sales tax on these occasions if you spend over a qualifying dollar amount. The holidays usually take place in April, May, and August. August's dates often exempt clothing, backpacks, and back-to-school supplies.

Other Texas State Taxes

The state's gas tax has been set at 20 cents per gallon on diesel and unleaded fuels since 1991. That works out to just under $10 per month for the average driver.

Texas taxes cigarettes at $1.41 per pack. Using a hotel, bed and breakfast, or similar short-term stay will cost you another 6% of the cost of the room in taxes.  Certain cities, counties, and other districts might impose an additional local hotel tax.

Texas also used to have a fireworks tax of 2%, but this law was repealed effective September 1, 2015.

A Summary of Texas Taxes

All in all, there are worse places to live than Texas if you're concerned about your tax burden.

  • Cigarette tax: $1.41 per pack.
  • Estate tax: None.
  • Franchise tax on businesses: 0.375% to 0.75% on revenues exceeding $1.18 million.
  • Gas tax: 20 cents per gallon.
  • Hotel tax: 6% of the cost of accommodations.
  • Individual income tax: None.
  • Inheritance tax: Repealed in 2015.
  • Personal property tax: None except for property used for business purposes (set by county districts).
  • Property tax exemptions: A homestead exemption is available, and exemptions are available for senior citizens, disabled persons, and disabled veterans.
  • Real estate tax: Set and appraised by county districts (no state real property tax).
  • Sales tax: 6.25% at the state level. (Local taxes can be added on.)

Frequently Asked Questions (FAQs)

Is Texas a tax-friendly state for retirees?

Texas is considered one of the top tax-friendly states for retirees. It does not tax pension payouts or income, and offers property tax exemptions that may provide additional benefits to retirees.

What personal property is taxed in Texas?

In Texas, property tax applies to all personal property that is used to make an income. This can include automobiles, machinery, supplies, furniture, inventory, and more. If it is not directly responsible for earning income, it does not count, for example, when you drive your car to and from work, it doesn't count as being used to make income, so it is exempt from personal property taxes.