Do Texas Residents Pay Federal Income Tax?

Texas is one of the few states that does not impose a personal income tax on its residents. This distinction often raises questions about tax obligations. While the absence of a state income tax is a benefit, it does not eliminate the responsibility to pay federal income taxes to the United States government.

Federal Income Tax Obligation for Texas Residents

The requirement to pay federal income tax is determined by federal law, making it independent of any state’s tax system. Residency in Texas does not alter the legal obligation to pay federal taxes. This national tax applies to all U.S. citizens and residents who meet certain income thresholds.

The federal government levies taxes on a wide array of income sources, including wages, salaries, self-employment profits, investment earnings, and capital gains. Therefore, a Texan’s paycheck will still be subject to federal income tax withholding, along with Social Security and Medicare taxes.

Impact on Federal Tax Deductions

The absence of a state income tax in Texas influences how residents can use the State and Local Tax (SALT) deduction. Taxpayers who itemize deductions on Schedule A of Form 1040 can deduct certain state and local taxes they have paid. This deduction is capped at $10,000 per household annually, but this limitation is scheduled to expire at the end of 2025.

Since Texas residents do not pay state income tax, they have the option to deduct their state and local sales taxes instead. To determine the sales tax deduction amount, a taxpayer can either use the IRS’s optional sales tax tables or deduct the actual amount of sales tax they paid.

The IRS tables provide a standard deduction amount based on income and family size, which can be supplemented with the sales tax paid on large purchases like a motor vehicle or boat. Alternatively, if a taxpayer has kept records throughout the year, they may find that deducting their actual sales tax payments results in a larger deduction.

Texas Community Property Rules and Federal Filing

Texas is a community property state, a legal distinction with implications for how married couples handle federal income taxes. In a community property state, most income earned by either spouse during the marriage is considered owned equally by both. This principle dictates how income must be reported to the IRS for couples who opt for the “Married Filing Separately” (MFS) status.

When a married couple in Texas files separate federal returns, each spouse is required to report one-half of the total community income. For example, if one spouse earned $100,000 and the other earned $50,000, each must report $75,000 of income on their separate MFS returns.

This allocation is detailed on IRS Form 8958, Allocation of Tax Amounts Between Certain Individuals in Community Property States, which must be attached to each spouse’s return. The form requires a detailed breakdown of all community income sources and shows how that total is split evenly between the two spouses.

Other Key Texas Taxes

While Texans have no personal income tax, the state and its local governments rely on other forms of taxation to fund public services. A primary source of revenue is the state sales tax, which is applied to the purchase of most goods and certain services. The statewide rate is 6.25%, but local taxing jurisdictions can add their own sales taxes, bringing the combined rate up to a maximum of 8.25%.

Property taxes are another component of the Texas tax system, levied by local entities like school districts and cities. These taxes are assessed on the value of real estate and can be higher than in other states.

Finally, Texas imposes a franchise tax on certain business entities. For the 2024-2025 reporting period, entities with total annualized revenue of $2.47 million or less are exempt from paying this tax.