When compared to other states, Texas's tax burden is relatively light. There is no state income tax in Texas, which makes it one of only eight states overall. The majority of the state's revenue is generated from taxes on businesses and various industries, in addition to sales taxes. There is a property tax in Texas; however, its collection is handled not by the state but rather by local governments (cities, counties, and school districts). The revenue that it generates can only be used for the needs of the local community. In general, Texas is a relatively tax-friendly state. According to the findings of the Tax Foundation, the overall burden of state and local taxes in this state places it in 46th place among all states. The combined weight of state and local taxes is only 7.6 per cent of total income. Compare this to New York, which led the pack (and had the highest overall tax burden) in 2021 with a rate of 12.7 per cent.
Key Takeaways
- Both personal and estate income are exempt from taxation in the state of Texas. In 2015, the nation did away with its inheritance tax.
- At the state level, the sales tax rate is 6.25 per cent, and additional taxes at the local level may apply. In addition, the state of Texas levies taxes on cigarettes, gasoline, and hotels.
- A tax on the personal property does not exist, with the exception of property that is used for commercial purposes.
- County districts are responsible for establishing real estate taxes and conducting property appraisals. Numerous property tax exemptions are available.
The Texas Franchise Tax
In 2021, Texas will no longer impose an income tax on individuals; however, the state will continue to charge a franchise tax of 0.375 per cent on certain wholesalers and retailers. Other types of non-exempt businesses are subject to a rate that is 0.75 per cent higher. This kind of income tax is also known as a "privilege tax," and it is levied on total business revenues that are greater than $1.23 million in the years 2022 and 2023. NOTE- The franchise tax is not required to be paid by sole proprietorships and certain types of general partnerships. Every year, the deadline for filing franchise tax returns is May 15, or the first business day after that date if May 15 falls on a weekend or a holiday. After 61 days have passed since the original payment due date, interest will start to accrue on overdue franchise debts. After the first thirty days, there is a possibility of incurring penalties of up to ten per cent.Taxes on "Death" in the State of Texas
It is common practice to refer to both inheritance and estate taxes collectively as "death taxes." On September 15, 2015, Texas did away with its inheritance tax entirely. Even though there is no estate tax in Texas, beginning in 2022, the federal government will begin taxing estates that are worth more than $12.06 million if they are worth more than that amount.Taxes on Real Property in Texas
The assessed current market value of the real estate and income-producing tangible personal property is used to determine the amount of property taxes that must be paid. When discussing the private property, "income" is the most important concept to keep in mind. Even though your car might be considered tangible personal property, you are exempt from paying tax on it as long as you do not use it in any way that contributes to your income. It does not count if you just drive it to and from your place of employment. County districts are the ones in charge of carrying out property appraisals. The appraiser will evaluate your property based on how it stacks up against other comparable properties that have recently changed hands in the neighbourhood. Your property tax bill is calculated by first determining the appraised value of your property and then multiplying that number by the local tax rate. Counties and school districts are the ones who decide on these rates. They are determined by annual budgets and the amount of revenue that each district needs to bring in to cover its expenses. NOTE- Tax increases are a topic that is frequently brought up at public hearings that are held by local governments. In the state of Texas, residents have the right to petition for a public vote on tax increases that exceed predetermined thresholds. The value of the crops, livestock, and timber that are produced by the land can be used as the basis for a special appraisal that can be requested by the owners of agricultural or timberland property. This can lead to lower appraisals, which in turn can result in lower taxes.Exemptions from Property Tax in Texas
Exemptions from property taxes bring about a drop in the property's appraised value, which in turn brings about a reduction in the owner's overall tax liability. When applied to a property with an appraised value of $200,000, a tax rate of 1.8 per cent results in a tax liability that is greater than 1.8 per cent when applied to a property with an appraised value of $175,000. The difference amounts to $450 in total. The state of Texas provides a number of available exemptions.The exemption for primary residences
If you live in the home as your primary place of residence as of the first day of the tax year, you may be eligible for a reduction of up to $25,000 in the property's appraised value. The school districts in Texas are given the option of providing a separate exemption of up to twenty per cent of the property's appraised value by the Texas State Code. This local exemption can't be less than $5,000, no matter how much it is.Age-related and disability-related tax exemptions
Homeowners who are 65 years of age or older or who are disabled may be eligible for an additional tax exemption in the amount of $10,000 from their local school district, in addition to an exemption for any other local property taxes that cannot be less than $3,000. The homeowners in the school district can't be taxed more than what they paid in the first year that they qualified for the exemption, which means that the tax is effectively frozen. Widows or widowers age 55 or older whose deceased spouse qualified for the 65-or-older exemption can continue to receive the exemption themselves if they apply.Exemption for Disabled Veterans
Veterans of the United States Armed Forces who have suffered a disability as a direct result of their time in the armed forces and who have served the country may be eligible for a very generous disabled veteran's exemption. This exemption is equivalent to one hundred per cent of the value that was placed on the primary residence of the taxpayer. Additionally, the state of Texas provides a property tax exemption for devices that are powered by solar or wind energy, in addition to several other exemptions for charitable organisations and businesses.Sales Taxes in Texas
The state sales tax in Texas is currently set at 6.25 per cent. However, individual municipalities have the ability to levy their own sales taxes on top of this, which in some regions can bring the total rate up to as high as 8.25 per cent. Food that has not been prepared, prescription medications, and over-the-counter medications are not subject to sales tax. Additionally, throughout the year, the state will offer sales tax "holidays." If you spend more than the allotted amount during these events, you are eligible to have certain purchases exempt from the applicable sales tax. The months of April, May, and August are traditionally reserved for the celebration of the holidays. August's dates typically exempt clothing, backpacks, and other supplies needed for back to school.Other Taxes Levied by the State of Texas
Since 1991, the gas tax in this state has been fixed at a rate of twenty cents per gallon for both diesel and unleaded fuels. That works out to slightly less than ten dollars per month for the typical motorist. The state of Texas levies a tax of $1.41 per pack on cigarettes. Taxes will add an additional 6% to the total cost of the room if you choose to stay in a hotel, bed and breakfast, or another similar type of short-term accommodation. There is a possibility that some municipalities, including cities, counties, and other districts, will levy an additional local hotel tax. Additionally, there was a fireworks tax in the state of Texas that was set at 2%; however, this law was eliminated as of September 1, 2015.Is There a Favorable Tax Climate for Retirees in the State of Texas?
Many retirees choose to spend their golden years in Texas because of its low overall tax burden. It does not impose any taxes on income or pension payouts. Property tax exemptions are provided, which can be an additional benefit for retirees who take advantage of them.What Kinds of Tangible Personal Property Does Texas Tax?
The state of Texas levies a tax on all forms of personal property that are utilised in the production of taxable income. This can include things like automobiles, machinery, supplies, furniture, inventory, and many other things. Exempt from the tax is the property that is not directly responsible. If you drive your car to and from work, that does not count as an instance in which it was used to generate income.