Texas Tax Benefits for Individuals and Businesses
Understand how the Texas tax code is structured to lower financial burdens and foster an environment of growth for both its residents and companies.
Texas has a favorable tax structure that influences financial decisions for both individuals and businesses. The state’s approach to taxation, which differs from many others in the nation, has contributed to its economic and population growth.
No State Personal Income Tax
Texas is one of the few states that does not levy a personal income tax on wages, salaries, or other personal earnings. This results in a higher amount of take-home pay from each paycheck, as no portion is withheld for state income tax.
The lack of a personal income tax also benefits owners of pass-through businesses like sole proprietorships, partnerships, LLCs, and S corporations. For these entities, profits are not taxed at the business level but “pass through” to the owners’ personal returns. Since Texas has no personal income tax, this profit is not subject to state-level taxation.
This tax benefit applies only at the state level. All Texas residents and business owners remain subject to federal income taxes as required by the IRS. This includes taxes on wages and profits from pass-through entities, which must be reported on a federal tax return.
Business Franchise Tax Advantages
The primary business tax in Texas is the franchise tax, assessed on a taxable entity’s “margin” rather than its income. This tax applies to corporations, LLCs, and partnerships, but excludes sole proprietorships and certain general partnerships. A business’s taxable margin is its total revenue minus a deduction, such as the cost of goods sold or compensation.
A feature of this system is the “no tax due” threshold. For the 2024 and 2025 report years, businesses with annualized total revenue at or below $2.47 million owe no franchise tax. This high threshold exempts many small and medium-sized businesses from payment.
As of 2024, businesses with revenue below the $2.47 million threshold are no longer required to file a “No Tax Due Report,” though they must still submit an annual Public Information Report (PIR) or Ownership Information Report (OIR). For businesses with revenue above the threshold but under $20 million, an “E-Z Computation” method is available with a reduced tax rate of 0.331%.
Property Tax Relief Measures
While property taxes are administered locally, the state offers several relief measures. The primary one is the general residence homestead exemption, which reduces a homeowner’s property tax burden. This exemption lowers the home’s appraised value for tax assessment purposes.
State law mandates that all school districts provide a $100,000 exemption on a primary residence. For example, if a home is appraised at $300,000, school district taxes are calculated on a value of $200,000. To claim this benefit, the owner must use the property as their principal residence and file an application, Form 50-114, with their county appraisal district. The application requires proof of residency and ownership, often verified with a Texas driver’s license showing the homestead’s address.
Beyond the mandatory school district exemption, cities and counties can offer an additional local option exemption of up to 20% of the property’s value, with a $5,000 minimum. Individuals over 65 or with a disability qualify for an additional $10,000 exemption from school district taxes. Qualifying disabled veterans may also receive exemptions based on their disability rating.
Sales and Use Tax Exemptions
The state’s sales and use tax system includes targeted exemptions that lower costs for individuals and businesses. The statewide sales tax rate is 6.25%, though local jurisdictions can add to it. These exemptions remove this tax from specific goods and services.
For individuals, exemptions apply to many purchases. Most food items for home preparation, like produce, meat, and bread, are exempt from sales tax, though this does not apply to prepared foods. Prescription drugs and over-the-counter medications are also exempt.
For businesses, exemptions are available for certain investments. Machinery and equipment used directly in manufacturing, processing, or fabricating property for sale are exempt from sales tax. This lowers the capital investment for industrial operations. Items purchased for research and development are also exempt.