After completing your federal income taxes, the last thing you want to do is sit back down and get to work on your state taxes. Fortunately, it doesn’t have to be difficult: use Community Tax’s State Tax Calculator tool to figure out exactly how much you owe so that you don’t end up overpaying or underpaying this year.
Plus, with sometimes serious penalties imposed on folks who fail to pay taxes or accidentally pay them incorrectly, it might be worth it to consider a professional tax preparer.
Before you start your taxes, though, check out this guide to Texas state taxes. It will start to walk you through every area that you need to worry about. So take a minute and get familiar with the great state of Texas’s tax policies!
Overview of Texas State Taxes
In the USA, not only does the Federal Government reserve the right to levy taxes on its citizens, but the governments of individual states do too. Tax policies are decided on a state-by-state basis, so no two states’ policies are exactly the same.
Even though the Federal Government supplies states with funding for certain services, additional revenue is needed internally to keep everything up and running. Income taxes collected in Texas are used to fund important services that we rely on every day, like schools, roads, emergency services, and so much more. To start, here are some of the most important taxes to keep in mind:
Texas State Taxes: Quick Facts
Income tax: 0% Personal income tax
Sales tax: 6.25 - 8.25%
Property tax: 1.81% Average
Luckily, if you live in the Lone Star State, your tax burden is a little lighter than many other states. The lack of income tax is a huge benefit to high-earners living in Texas! However, property taxes are a bit higher than many other states in the country.
Texas, just like any other state, has plenty of quirks and specifics to keep in mind when you’re getting ready to file. Be sure to keep reading for a solid overview of each potential area where you may be taxed, and where you might get the biggest return come tax season.
Texas Personal Income Tax
Income taxes are taxes that the state or federal government imposes on your earned income. Every month, when you get your paycheck and see a portion has been taken out, some of that is due to income tax. (This is in addition to the amount that might be subtracted for social security and your own retirement.)
However, if you live and work in Texas, you’re in luck: the state itself does not collect income tax.
However, you will still be subject to federal income tax at a rate based on your income.
If you’re wondering how Texas is able to bring in enough revenue without imposing any income tax on its residents, here’s a chart that shows the various sources of revenue Texas does collect.
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Capital gains taxes are applied to any money made through investments. This can include stocks you may own, property, or bonds. While the US government does impose a capital gains tax on income made off these assets, the State of Texas does not. Luckily for you, this means you get to keep more of the profits!
That means that the capital gains tax bracket you fall into will simply be your federal one. The minimum amount possible is 0% for those making under $39, 950 in taxes, but the maximum, for those bringing in over $418,000 is 25%.
In Texas, however, you only pay those federal levels — no additional State capital gains tax is levied.
Texas State Sales Tax
While the federal government does not impose a sales tax, it guarantees the right to states to do so. Counties and cities within states may also impose their own sales tax in accordance with state law. In Texas, the state sales tax rate is between 6.25% - 8.25%.
The statewide sales tax rate is 6.25%. This is somewhat higher than average, but still well below California’s state sales tax of 7.25% (the highest in the country).
However, the State of Texas also allows taxing jurisdictions (which includes cities, counties, special districts, and transit authorities) to levy their own additional sales tax up to 2%. So, depending on where you go in the state, the sales tax could be as low as 6.25% or as high as 8.25%, with most counties falling somewhere in the middle.
The addition of local jurisdiction sales tax actually raises Texas’s standing among US states to 9th highest. Taxes tend to be higher in dense urban areas, so if you’re planning a trip to Austin, Dallas, Houston, or San Antonio, you can expect the taxes there to be a little higher than in Laredo or Abilene.
Texas Excise Taxes
In addition to regular sales tax, many states of the Union levy a tax on items that have negative effects on society if they are too widely available and cheap. In some cases, excise taxes are applied to goods that have a negative impact on health or the environment. Common items that are subject to such “sin taxes” are alcohol, tobacco, gasoline, and in the states where it is legal, marijuana.
Like many states, Texas taxes alcohol dependent on the kind of drink you’re buying or the ABV (alcohol by volume) of the beverage. Here’s how the state taxes alcoholic beverages.
Malt Liquor (Ale)
Texas Comptroller, 2019
The state taxes cigarettes differently from other tobacco products; see the Texas Comptroller chart below to see how they’re taxed in Texas.
Rate and Base
Cigar and Tobacco Products Tax
1 cent per 10 cigars weighing 3 lbs per 1,000 cigars or less
$7.50-$15.00 per 1,000 cigars weighing more than 3 lbs per 1,000, depending on factory price and amount of non-tobacco ingredients.
$1.22 per 1 ounce of chewing, pipe or roll-your-own tobacco and snuff
$70.50 per 1,000 cigarettes weighing 3 lbs or less ($1.41 per pack of 20)
$72.60 per 1,000 weighing more than 3 lbs
A tax rate of $3.50 per gram of marijuana used to be imposed, but this law was repealed in 2015. Marijuana is not legal in Texas. CBD oil is legal in cases of extreme Epilepsy, but no recreational THC use is allowed.
The Federal Government places an 18.3¢ per gallon tax on all fuel sales, and a 24.3¢ per gallon tax on diesel. States may also levy their own taxes on gasoline. Both are often used to fund road repairs and other infrastructural maintenance. In Texas, gasoline is taxed at 0.20¢ per gallon, and diesel is taxed at 21.5 cents.
That means that every time you fill up, you’re actually paying a lot in taxes — 38.3 ¢ per gallon for gasoline and 45.8¢ per gallon for diesel to be specific!
Texas imposes a statewide tax on earnings acquired through gambling on horse and greyhound races, as well as a tax on “sexually-oriented businesses” at a rate of $5 per patron.
Life, accident and health insurers, including health maintenance organizations (HMO): 1.75%
A half tax rate of .875 percent is due on the first $450,000 of life insurance or HMO premium
Title insurers: 1.35%
Reciprocal or inter-insurance exchanges: 1.7%
Texas State Property Tax
For a state known for its conservative politics, libertarian-leaning values, and lenient attitude toward taxation, Texas actually has some surprisingly high property tax rates. While the state does not impose its own property taxes, counties and other jurisdictions are allowed to impose one.
Here are some quick facts to consider regarding Texas’s property taxes:
While rates vary by county, the average amount paid in property taxes is $2,275 on a home worth $125,800, which is the median home value.
That’s 1.8% — actually higher than California’s (a state known for its progressive tax codes) 0.74% average!
The average Texan pays 3.65% of their yearly earnings in property taxes.
This is the 3rd highest rate of property tax in the country.
There is no universal state property tax levied in Texas.
Property tax rates vary by county or municipality.
You should also be aware, if you’re planning on starting a business in Texas, that there are particular franchise taxes that Texas business owners must pay. Here’s a chart describing the franchise tax rates.
How are property taxes assessed?
Property taxes are appraised at their fair market value — the value at which they would sell for at a fair price if put up for sale that year — and taxed based on that value. A tax appraiser may come around your neighborhood every few years and assess the way your property will be taxed in the coming cycle or cycles.
Another area where Texas’s tax code is lenient is in estate taxes: the state charges none! Rest assured that your next of kin will receive the value of the assets you left them unencumbered by any state taxes.
However, depending on the nature of the estate, federal tax rules may apply. You should note that above certain amounts (as of 2019, $11.4 million) the federal government can exact an estate tax, so the associated forms will need to be filled out.
Be sure to speak with a tax expert when planning your estate to be sure that you are able to pass on as much as you can to your loved ones.
Texas State Tax Credits
States provide a few different methods to relieve taxpayers of undue tax burdens. Most often, these include credits, exemptions, and deductions. A tax credit is a reduction in the total amount of taxes you owe, dollar for dollar. An exemption decreases the amount of income that is subject to tax, and a deduction reduces the total value that you’re taxable for.
Though Texas does not levy any income tax, certain tax credits are available to put toward your property taxes.
Historical Preservation Tax Credit
Texas offers a tax credit for those who preserve history through buildings they own. Find out whether your building has enough historical significance to qualify!
Investment Tax Credit
Certain kinds of investments under particular circumstances allow possible tax credits. Be sure to speak with a tax specialist to see if any of your investments qualify you.
Jobs Creation Tax Credit
For business owners who create jobs in their communities, some tax credits are available. A Texas tax specialist will be able to help you determine whether this applies to your business.
Research and Development Credit
For certain innovators, you might be able to get tax credit for the money you spend on R&D. Be sure you consult with a tax expert on whether the money you put toward research and development qualify you for this tax credit.
The rules regarding tax credits are likely to change year-by-year, so be sure you’re always consulting with a professional before claiming tax credits on your state returns.
Texas State Tax Exemptions and Deductions
Perhaps the biggest tax exemption that Texas offers is the fact that it simply does not impose an income tax on its residents. While other states have cumbersome systems to determine what percentage or amount of your state income taxes you may be exempt from, or what expenses or donations you may be able to deduct from your state income taxes, Texans do not have to worry about this. All residents are exempt from state income tax.
However, income taxes aren’t the only place where taxpayers could use a relief. The State of Texas also offers exemptions and deductions on property taxes under these conditions.
Residence Homestead: $25,000+ exemption
In the tragic event that one’s spouse should pass away and leave their partner behind struggling financially, homestead exemptions can lift some of the terrible burden.
In Texas, the Tax Code mandates that school districts offer a $25,000 exemption. In addi tion to this, local taxing authorities can decide to exempt up to 20% of the assessed property value. However, the minimum exemption is $5,000.
Age 65 + or Disabled: $10,000 exemption
Folks nearing or at retirement as well as those with certain disabilities may qualify for tax exemptions under Texas’s property tax code. School districts are mandated to offer a $10,000 exemption to seniors living in their homes, as well as another possible $3,000 exemption decided by local authorities.
This benefit is also available to folks over the age of 55 if their spouse has passed away but had qualified for and applied for the exemption.
Disabled Veterans: Variable up to 100% exemption
As in many states, veteran tax benefits are dependent upon the percent disability status. In Texas, property tax exemptions are commensurate with percent disability status, with a 100% disability rating (meaning service-related disability severe enough to make working impossible) earning a 100% property tax exemption.
These benefits are also available to the surviving spouse and children of veterans who have passed away.
This exemption extends to a surviving spouse who was married to a disabled veteran who qualified or would have qualified for this exemption if it has been in effect at the time of the veteran's death provided:
the surviving spouse has not remarried;
the property was the residence homestead of the surviving spouse when the veteran died and;
the property remains the residence homestead of the surviving spouse.
Solar & Wind: Variable by county or municipality
Texans who choose to live more sustainably by making use of solar or wind power may benefit from county-specific exemptions. While this isn’t mandated statewide, some municipalities, like Houston, offer exemptions for those who use alternative forms of energy to power their homes.
Charitable Organizations: Variable by county or municipality
If the property in question is a charitable organization or business, Texas state law offers specific exemptions based on the kind of charity and other factors regarding the property and your business. See section 11.1827 of the tax exemption handbook for details on the applications you may need to fill out to be considered for such exemptions.
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Texas does not impose income taxes on its residents, so in addition to not having to pay the state anything out of your paycheck, you get the added perk of not having to fill out state income tax returns! That’s a win-win.
However, come tax season, you’ll still want to be aware of the state taxes you are responsible for. Be sure that you keep all necessary information on file and accessible:
Information on your disability status.
Information on your or your spouse’s veteran status.
Applications for homestead exemptions that either you or your late spouse filed.
Don’t forget about federal income taxes; Texas’s lax attitude toward income taxes may make you so relaxed you forget about filing federal taxes. Make sure you have your IRS W-2 Forms sent to you by your employer.
Remember that it’s okay to ask for help. Taxes can be difficult, and if you’re dealing with multiple forms and worksheets for several different exemptions, they’re a real headache. Contact a tax expert for help walking you through everything you need to know to keep money in your pocket.
Fallen behind on state taxes? Get help with tax resolution today!
While Texas does not charge any income tax, you can still file your taxes online to get your refund for any deductions, exemptions or credits you might claim.
There are also a number of special filing conditions; for instance, earners who paid more than $500,000 in taxes must file through TEXNET. Visit the Texas File and Pay site for more details on special circumstances that may apply to you.
Now that you’re brushed up on some of the tough technical stuff regarding Texas taxes, it’s time for some fun stuff!
If Texas were its own country, it would be the 10th largest economy on earth.
If you swap the “e” and “a” in the word Texas, it becomes the word Taxes!
Texas has lower than average gas prices, at 2.33 per gallon, according to AAA.
In Texas, belts may be exempt from sales tax, very much in keeping with its classic cowboy culture.
Cowboy boots may also be exempt from sales tax, which resumes the pattern of cowboy culture-themed tax exemptions.
Summary of Federal Taxes
Remember that state taxes are only half of the job! Federal taxes must also be filed every year. If you need help preparing your federal or state income taxes, with navigating difficult to understand regulations, worksheets, and tax handbooks, or understanding the difference between state and federal taxes, contact one of our professional tax preparation specialists
Summary of Federal Taxes
Remember that Texas state taxes are separate from federal state taxes and that the Texas tax brackets are different at a state level.
Call us to strees less and save more on your federal tax refund.
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