How to Do Taxes in Texas: Filing, Payments, and Local Obligations

Understanding how to manage taxes in Texas is essential for residents and businesses, given the state’s unique tax landscape. While Texas does not impose a state income tax, there are various other obligations that individuals and organizations must navigate to remain compliant. This guide will help you understand key aspects of filing federal returns from Texas, local tax responsibilities, and managing payments efficiently.

Gathering Financial Documents

Filing taxes in Texas starts with gathering comprehensive financial documents. Collect income-related forms, such as W-2s for employees and 1099 forms for independent contractors, to report earnings accurately to the IRS. For those with investment income, forms like 1099-DIV for dividends and 1099-INT for interest income are equally important. Ensuring these records are complete minimizes discrepancies that could lead to audits or penalties.

Also, assemble records of deductible expenses, including receipts for mortgage interest, property taxes, and charitable contributions. These documents are essential for reducing taxable income. Business owners should maintain detailed records of expenses like office supplies, travel, and utilities to substantiate deductions and manage financial health. Accounting software can streamline this process, offering efficient organization and easy access to records.

Staying informed about tax law changes is crucial. For example, the Tax Cuts and Jobs Act introduced significant updates to deductions and credits. Consulting a tax professional can clarify complex rules, such as the Qualified Business Income Deduction for pass-through entities, ensuring compliance and maximizing benefits.

Filing Federal Returns from Texas

Filing federal tax returns as a Texas resident requires understanding how living in a state without income tax affects obligations. Texas residents are exempt from state income tax filings but must still meet federal requirements. Federal tax liability is calculated based on income and filing status, with 2024 tax brackets ranging from 10% to 37%.

Choosing the correct filing status is critical, as it affects tax rates and the standard deduction. Options include single, married filing jointly, and head of household, each with specific criteria. For example, the 2024 standard deduction for married couples filing jointly is $27,700, which substantially reduces taxable income.

Deductions and credits can significantly lower tax liability. Texas residents should explore credits like the Earned Income Tax Credit (EITC) and the Child Tax Credit (CTC), which reduce the amount owed or increase refunds. Contributions to Individual Retirement Accounts (IRAs) and Health Savings Accounts (HSAs) also provide valuable deductions. IRS Form 8880 can help claim credits for retirement savings, offering further tax relief.

Texas Tax Obligations Beyond Income Tax

While Texas lacks a state income tax, residents and businesses must address other tax responsibilities. The state sales tax, currently 6.25%, applies to most goods and services. Local jurisdictions can add their own sales taxes, often bringing the total rate to 8.25%. Businesses must collect and remit sales taxes to the Texas Comptroller of Public Accounts to avoid penalties, which range from 5% to 10% of unpaid amounts.

The franchise tax is another major obligation for Texas businesses. Based on revenue, the no-tax-due threshold for 2024 is $1,230,000. Businesses exceeding this threshold face rates of 0.375% for retail/wholesale entities and 0.75% for others. Even businesses owing no tax must file an annual report to remain compliant.

Property taxes are a significant part of Texas’s tax system. Local governments rely on these taxes for funding services like education and infrastructure. Rates vary by county, and appraisal districts determine property values. Residents and businesses should understand their property tax responsibilities and explore exemptions like the homestead exemption, which can lower the taxable value of a primary residence.

Handling Local Levies

Managing local levies in Texas requires familiarity with municipal and special district taxes. Cities and counties often impose taxes for public services and infrastructure projects. For example, many cities have hotel occupancy taxes, typically between 7% and 9%, in addition to state-imposed rates. Businesses in hospitality must report these taxes accurately to avoid penalties.

Special purpose districts, such as public utility districts (PUDs) and municipal utility districts (MUDs), also levy taxes to fund services like water and wastewater management. These districts may issue bonds and levy property taxes to repay them, affecting local tax obligations. Residents and businesses should account for these taxes when planning finances and ensure compliance with their specific districts.

Submitting Payments and Refunds

After determining tax obligations, the next step is managing payments or claiming refunds. Federal tax payments can be made directly to the IRS through options like IRS Direct Pay, which allows fee-free bank transfers. Credit or debit card payments are also available, though third-party processors charge convenience fees. Businesses can use the Electronic Federal Tax Payment System (EFTPS) for secure, scheduled payments, particularly for payroll or estimated taxes.

Refunds are issued after IRS approval of submitted returns. E-filing with direct deposit typically expedites refunds, with processing times averaging 21 days. Taxpayers can track refunds using the IRS’s “Where’s My Refund?” tool. Texas residents receiving refunds might consider using the funds for long-term financial goals, such as contributing to Roth IRAs or 529 college savings plans. Adjusting withholding amounts on Form W-4 can also help avoid overpayments in the future.

Record Retention

Keeping accurate records is essential for tax compliance and financial management. The IRS generally advises retaining tax-related documents for at least three years from the filing date or two years from the payment date, whichever is later. Certain situations, such as claiming a loss from worthless securities, require keeping records for up to seven years.

Effective organization reduces stress during tax season. Digital storage solutions, like cloud-based platforms, offer secure and accessible archiving for receipts, bank statements, and past returns. Businesses should ensure their records meet any industry-specific requirements. For example, companies subject to the Texas franchise tax must document revenue calculations and deductions. Property owners should retain appraisal notices and payment receipts to address potential disputes with local taxing authorities over valuations or tax assessments.