Does Texas Have State Income Tax?

Explore the Tax Benefits and Financial Tradeoffs of Living in the Lone Star State

Introduction

For individuals thinking about relocating, few financial factors weigh as heavily as state taxes. That’s why one of the most frequently asked questions by prospective movers is: Does Texas have a state income tax?

The short and straightforward answer is no—Texas does not impose a state income tax. This policy makes the Lone Star State an attractive destination for people across various stages of life. Whether you’re a young professional looking to grow your income, a retiree trying to make your savings last, or a remote worker seeking a tax-smart home base, Texas offers a significant tax advantage by allowing you to keep more of what you earn.

But no state is entirely without taxes. While skipping the income tax may seem like a major win—and often is—Texas recoups this lost revenue in other ways, primarily through higher property and sales taxes. To get the full picture, it’s important to understand what life in Texas looks like from a complete financial perspective.

Is Texas a Tax-Friendly State?

In terms of income taxes, Texas is among the most tax-friendly states in the U.S. This is particularly attractive for high earners, entrepreneurs, and people with significant investment or retirement income. By not taxing personal income, the state offers the potential for considerable savings compared to states like California or New York, where top earners can pay double-digit state income tax rates.

Key Tax Benefits in Texas

No state income tax on wages
No tax on retirement income, including Social Security, pensions, and distributions from IRAs or 401(k)s
No state tax on capital gains or dividends

These benefits appeal not just to individuals but also to business owners and self-employed professionals who often face significant state tax liabilities elsewhere.

What’s the Tradeoff?

While residents benefit from no income tax, Texas makes up for this by relying more heavily on:

Property Taxes: Texas has some of the highest property tax rates in the nation. The average effective rate is around 1.6–1.8%, significantly higher than the national average of about 0.99%. This can be a major factor for homeowners.
Sales Taxes: The statewide base sales tax is 6.25%, but local jurisdictions can add as much as 2%, pushing the total to 8.25% in many cities. This can raise the cost of everyday purchases, especially for families.

What Does “Tax-Friendly” Really Mean?

“Tax-friendly” doesn’t mean you won’t pay taxes—it means your overall tax burden might be lower, depending on how you earn and spend your money. For example:

A retiree living on Social Security and pension income may find Texas far more affordable than a state that taxes retirement income.
A business owner with high taxable income could save tens of thousands annually by relocating from a high-income-tax state to Texas.
A renter might benefit from the tax structure, while a homeowner in a high-value property might find the property taxes challenging.

The bottom line: Texas can be tax-friendly, but that friendliness depends on your individual financial profile.

Is Texas Expensive to Live In?

While taxes are one piece of the puzzle, cost of living is another essential factor. Many assume that because Texas lacks a state income tax, it must be cheap overall. The truth is more nuanced.

Overall Affordability

Texas is considered moderately affordable compared to the national average. According to recent cost-of-living indexes, the state's overall expenses are about 7–8% lower than the U.S. average. That said, Texas is a large and diverse state—costs vary significantly based on where you live.

Housing Costs

In cities like Austin, rapid population growth and high demand have driven up real estate prices dramatically.
Houston and San Antonio, on the other hand, offer far more affordable housing markets.
Rural areas and smaller towns often provide the best bargains for those looking to maximize their housing budget.

The median home price in Texas is lower than the national average, but property taxes can offset some of those savings.

Transportation and Utilities

Transportation costs tend to be higher in Texas due to the lack of public transit in many areas. Car ownership is almost a necessity, adding fuel, insurance, and maintenance costs.
Utilities and groceries are generally in line with or slightly below national averages, though utility costs can spike during extreme weather, particularly in summer.

In summary, while Texas offers many affordable options, your lifestyle and location choices will significantly influence your overall expenses.

Is Texas a Good State to Retire In?

Texas is often ranked among the top retirement destinations in the U.S., and it’s easy to see why. Retirees typically have fixed incomes, and the ability to avoid taxes on that income can dramatically improve financial security.

Top Reasons Retirees Choose Texas

No State Tax on Retirement Income: Texas does not tax Social Security, pensions, annuities, or retirement account withdrawals, making it ideal for retirees seeking to preserve their savings.
Senior Tax Relief: Homeowners aged 65 and older may qualify for property tax exemptions or homestead tax freezes that limit increases on school district taxes, offering significant long-term savings.
Mild Climate & Diverse Communities: With its mild winters and warm weather, Texas appeals to retirees from colder northern states. Additionally, the state boasts a wide variety of communities—from bustling urban centers to relaxed small towns.
Access to Healthcare: Texas is home to nationally recognized healthcare systems, including the Texas Medical Center in Houston—the largest medical complex in the world—making it a practical choice for retirees prioritizing access to care.

Conclusion

So, does Texas have a state income tax? The answer is a clear and resounding no. That distinction alone makes Texas stand out as a destination for those hoping to lower their tax liability and increase their disposable income.

But remember: taxes are only part of the equation. High property and sales taxes, along with regional differences in housing and living costs, mean that relocating to Texas might not save money for everyone. Whether you’re a retiree, entrepreneur, or wage earner, it’s crucial to assess your full financial situation.

Thinking about moving to Texas? Before making a decision, contact Dimov Partners to evaluate how Texas’s tax structure compares to your current state. Our dedicated team can help you understand the true impact on your income, housing costs, and long-term financial goals.