Texas State Taxes

FT Contributor  | 

The Lone Star State isn’t just one of the largest states in the country; it’s also one of the most tax-friendly.

Southern hospitality extends to your taxes, too, with some of the friendliest taxation policies in the country. Texans enjoy no state income tax, so here you can work hard and play even harder. Just be careful — your vices will cost you, with steady taxes on things like alcohol, cigarettes, and fireworks.

The Texas Comptroller is responsible for the collection of state taxes from the over 1,400 localities within its jurisdiction.

Texas Income Tax

Texas is only one of seven states to waive state income tax, and it can translate to thousands of dollars in savings each year.

Texans are still responsible for federal taxes, but now there’s an extra reason to celebrate every April with no state tax returns to file and no additional preparation fees to pay.

Texas Sales and Use Tax

Texas sales tax is 6.25% for sales and use when you sell, lease, or rent most goods. Taxable services are defined by the state and also subject to this rate. This includes 17 services such as insurance, security, and debt collection.

There are local taxes, too. Each city and county tax rate varies, with an average local sales tax rate of 1.94%. The average state and local sales tax amounts to 8.19%, with Houston and Dallas among the highest, at an average combined sales tax of 8.25%.

Certain items such as gas and fireworks are taxed separately in Texas and will be additional.

Some organizations qualify for nonprofit status and may be exempt from taxes. Others may be eligible for separate taxation altogether, such as animal rescue groups and animal shelters, which are taxed not as nonprofits, but as their own entity.

One of the top tips for a small business owner is to grab your sales tax permit as soon as possible. This enables the state to classify your business, so the appropriate sales and use tax can be assessed.

Texas Property Tax

Just like income tax, there is no property tax in Texas, allowing Texans to pocket an enormous amount each year with these savings.

You are still responsible for local property taxes, however. Property tax in Texas has a 2.53% average rate, which is high compared to the rest of the country.

This revenue is used to benefit public services, such as the maintenance of public roads, support for local schools, and funds for public emergency services.

Texas Inheritance Tax

When someone dies, their estate is sometimes taxed before it can be distributed to heirs. This is known as an estate tax.

Inheritance tax is a different matter; this refers to the tax levied against the inheritance itself, which is paid by the heir.

Inheritance and estate planning are a bit easier in Texas, where there has been no estate law since 2015. Only 11 states currently levy this tax.

Additionally, there is no inheritance tax.

Both estate tax and inheritance tax are a crucial part of what you need to know for estate planning because these state laws can significantly impact a person’s inheritance.

Other Taxes in Texas

There are other taxes assessed in Texas, too.

These are the kinds of taxes you won’t see on your annual tax return. They are assessed on your regular, everyday purchases and are simply added to the bill. The retailers and distributors are then responsible for paying these taxes to the state in accordance with current guidelines.

Gas Tax

In the state where gas is king, gas tax revenue is the fourth-largest source of income, responsible for over $3.4 billion in 2015 alone.

Each time you fill up at the pump, you pay a tax on each gallon. The current tax rate for 2020 is 20 cents per gallon. This tax rate is effective for both regular gasoline and diesel.

Tobacco Tax

Cigarettes are taxed, too, at an average rate of $1.41. This is based on a standard unit of one pack of 20 cigarettes.

Both cigarettes and cigars are taxed based upon total sales volume and paid by the selling establishment. Distributors and retailers must also possess an active Texas tobacco permit.

In accordance with the new December 2019 law, Texas limits tobacco sales to those 21 years of age and older. However, Texas makes two exceptions:

  1. Those born on or before August 31, 2001, and;
  2. Active military service members at least 18 years of age or older.

People under the age of 21 who meet either of the above qualifications are allowed to buy tobacco in Texas.

Alcohol Tax

If you prefer liquor, prepare to pay much more in Texas. Liquor is taxed at $2.40 per gallon, while beer and wine are just $0.20 per gallon.

There is a mixed beverage sales tax that retailers and establishments pay. It used to be paid quarterly, but as of October 2019, it is now due monthly.

Fireworks Tax

There is also a 6.25% state fireworks tax assessed on fireworks purchases.

If you sell fireworks, you must first register with the state for a permit and are limited to specific timeframes for legal sales.

Hotel Tax

During your last vacation, you may have noticed an extra tax on your hotel bill. There is a hotel tax in Texas that is assessed at 6% of the cost of the room.

Filing Taxes in Texas

Filing your taxes in Texas is easy thanks to a convenient online processing system, in addition to several other ways to file and pay.

The Texas Comptroller’s office uses a system called WebFile that allows you to not only pay taxes but also access current and past taxation details. There are many resources to help with filing, as well as current guidelines and updates.

The fiscal year in Texas runs from September 1 to August 31 each year, and payment can be made via electronic check, credit card, or paper check. Specific tax deadlines vary, depending on which taxes you file.

Texas is kind in many ways with its taxation policies, but it holds firm to the taxes it does charge. In short, don’t mess with Texas, and don’t mess with your taxes, either.


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