Texas Income Tax — 0% State Tax on Wages

The Texas Advantage: 0% State Income Tax

Keep more of your hard-earned money. Calculate how much you save by living in Texas compared to other states, and understand the trade-offs of the Lone Star State's tax system.

One of the most attractive features of living in Texas is its **0% state personal income tax**. Along with Alaska, Florida, Nevada, South Dakota, Tennessee, Washington, and Wyoming, Texas is one of the elite few states that does not tax individual wages. This policy is not just a temporary law; it is enshrined in the Texas Constitution, making it extremely difficult for future legislators to introduce an income tax without a statewide voter referendum.

This calculator demonstrates the power of that 0% rate. By inputting your salary, you can see not just what you pay in Federal taxes, but importantly, what you **save** by not paying a state tax compared to high-tax states like California or New York, where marginal rates can exceed 13% or 10% respectively.

How Texas Funds Itself: The "Three-Legged Stool" (Using Only Two Legs)

Most states fund their government using a "three-legged stool" of taxes: Income Tax, Sales Tax, and Property Tax. Texas has sawed off the "Income Tax" leg, meaning it must lean heavily on the other two to pay for roads, police, schools, and infrastructure. This creates a unique fiscal dynamic where the lack of one tax leads to higher rates in others.

Detailed Breakdown of Property Taxes in Texas

Since there is no income tax, property tax is the primary revenue generator for local governments. If you are moving to Texas, you must understand how this works, as it can be a significant monthly expense.

1. No State Property Tax: The State of Texas itself does not collect property tax. Instead, it is collected by local taxing units.

2. Stacked Taxing Units: Your property tax bill is a sum of rates from multiple entities:

• Independent School District (ISD): Usually the largest portion (often 1.0% - 1.4%).
• County: Funds courts, jails, and county roads.
• City: Funds police, fire, and parks (if you live within city limits).
• Special Districts: Hospitals, Community Colleges, and notably MUDs (Municipal Utility Districts).

3. The MUD Factor: In newer developments, MUDs are created to fund infrastructure like water and sewage. MUD taxes can add an additional 0.5% to 1.0% to your tax rate, sometimes pushing the total rate over 3%. When buying a home, always check if it is in a MUD and what the rate is.

4. Homestead Exemption: Homeowners can file for a Homestead Exemption on their primary residence. This provides two massive benefits:

• It lowers the taxable value of your home for school taxes (currently a $100,000 exemption as of recent legislation).
• It caps the increase in your home's assessed value at 10% per year, protecting you from spiking taxes during housing booms.

Comparing Your Take-Home Pay

Let's look at a practical example. Suppose you earn **$100,000** annually.

• **In Texas:** You pay roughly $14,768 in Federal Tax and $7,650 in FICA. **State Tax = $0.** Total Take-Home: ~$77,582.
• **In California:** You would pay an additional ~$5,300 in state income tax (approximate), reducing your take-home pay to ~$72,282.
• **The Result:** Living in Texas effectively gives you a **$5,300 annual raise** in this scenario simply by virtue of location. This "Texas Bonus" is a key driver of migration to the state.

Sales Tax: The Other Side of the Coin

Texas imposes a 6.25% state sales tax on all retail sales, leases and rentals of most goods, as well as taxable services. Local taxing jurisdictions (cities, counties, special purpose districts, and transit authorities) can impose up to 2% in additional sales and use tax for a maximum combined rate of 8.25%.

What is Taxable?

• Taxable: Clothing, electronics, furniture, restaurant meals, and most services like dry cleaning or cable TV.
• Exempt: Groceries (unprepared food), prescription medicine, and over-the-counter drugs.

Tax-Free Weekend: Every August, Texas holds a sales tax holiday where clothing, footwear, school supplies, and backpacks priced under $100 are exempt from sales tax. This is a popular time for back-to-school shopping.

Constitutional Protection: Proposition 4

In November 2019, Texas voters overwhelmingly approved **Proposition 4**, a constitutional amendment that prohibits the state from introducing an individual income tax. This was a critical move to solidify the state's tax identity.

This provides residents and business owners with a high degree of certainty that the tax environment will remain favorable for the foreseeable future. Unlike statutory laws which can be changed by a simple legislative vote, amending the constitution requires a 2/3 vote in both legislative chambers and a majority vote by the public—a very high hurdler.

Remote Work Implications and the "Texas Bonus"

The rise of remote work has made Texas an even more popular destination. If you work remotely for a company based in New York or California but reside in Texas in 2025:

1. You generally adhere to the tax laws of your **state of residence** (Texas).
2. Therefore, you pay **$0 state income tax** on your wages, even if the headquarters is in a high-tax state.
3. Note: Some states like New York have aggressive "convenience of the employer" rules that might try to claim tax on your income if you are telecommuting. Always consult a tax professional if your payroll department is based in another state.

Maximizing Your Savings

Since you are saving thousands on income tax, financial advisors often recommend redirecting those "savings" into wealth-building vehicles rather than lifestyle inflation.

• **Retirement Accounts:** Maximize 401(k) and IRA contributions. Since you don't get a state tax deduction for these (because there is no tax), the federal deduction becomes your primary tax benefit.
• **Property Tax Fund:** If you own a home, set aside money monthly to cover the hefty property tax bill at year-end if it's not escrowed by your mortgage lender.
• **College Savings:** Texas has no state tax deduction for 529 plan contributions (again, no income tax), but the growth is still federally tax-free.

Comparison with Other No-Income-Tax States

Texas is not alone in the zero-income-tax club. Here is how it stacks up against its peers:

• Florida: Similar structure with high reliance on sales tax (tourism). Property taxes are somewhat lower than Texas, but insurance costs are higher.
• Nevada: Heavily funded by gaming and tourism revenue. Sales tax is high (similar to Texas).
• Tennessee: Only recently phased out its "Hall Tax" on investment income. Sales tax is very high (averaging nearly 9.5%).
• Washington: No income tax, but has an estate tax and a capital gains tax on high earners (controversial).

The Verdict: Texas remains the most robust economy among the zero-tax states, offering the best blend of job opportunities and low tax burden, provided you manage your property tax exposure.

The SALT Deduction Strategy

Under federal tax law regarding the State and Local Tax (SALT) deduction, you can deduct up to $10,000 ($5,000 if married filing separately) of state and local taxes. In most states, people deduct their state income tax. In Texas, you have a distinct choice:

1. Deduct Property Taxes: For many Texas homeowners, property taxes alone will exceed the $10,000 cap. If your property taxes are $12,000, you deduct the max $10,000 and you're done.
2. Deduct Sales Taxes: If you don't own a home (or have low property taxes), you can deduct the state and local sales tax you paid. You can use the IRS optional sales tax tables (which estimate tax based on income) or track your actual receipts.

This flexibility is a nice perk. If you buy a Tesla, a boat, or do a major home renovation, deducting actual sales tax might save you more on your federal return than the standard table amount.

Historical Context: Why No Income Tax?

Texas's aversion to income tax dates back to its frontier roots and a strong populist streak. The state found wealth in land (cattle, cotton) and later below the land (oil). Severance taxes on oil and gas production allowed the state government to operate for decades without needing to tap into individual wages.

While oil revenue is more volatile today, the philosophy remains: tax consumption and property, not productivity. This aligns with a pro-business (and pro-worker) ethos that encourages earning and investing.

Cost of Living Analysis

Is the "Texas Miracle" affordable? It depends on where you land.

Housing: Prices in Austin have skyrocketed, rivaling parts of the West Coast. However, Houston, San Antonio, and the outskirts of Dallas remain relatively affordable compared to national averages. The high property tax acts as a natural dampener on price appreciation in some areas, as the carrying cost of a home is higher.

Goods & Services: Generally cheaper than the Northeast or West Coast. Gas is cheaper due to proximity to refineries and lower state gas taxes. Grocery prices are competitive, with chains like H-E-B providing low-cost options.

Conclusion: For a family earning $80,000+, the lack of income tax usually outweighs the higher sales and property taxes, leaving more money in your pocket at the end of the year.

Disclaimer: This calculator provides an estimate based on current tax laws. Tax situations can be complex and subject to change. Please consult a qualified CPA or tax attorney for advice specific to your financial situation.