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Texas Retirement Tax Friendliness

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Overview of Texas Retirement Tax Friendliness

There is no state income tax in Texas, which means Social Security retirement benefits and all other types of retirement income are tax-free. Texas has some of the highest sales taxes and property taxes of any U.S. state.

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You will pay of Texas state taxes on your pre-tax income of
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Quick Guide to Retirement Income Taxes
is toward retirees.
Social Security income is taxed.
Withdrawals from retirement accounts are taxed.
Wages are taxed at normal rates, and your marginal state tax rate is %.
  • Our Tax Expert

    Jennifer Mansfield, CPA Tax

    Jennifer Mansfield, CPA, JD/LLM-Tax, is a Certified Public Accountant with more than 30 years of experience providing tax advice. SmartAsset’s tax expert has a degree in Accounting and Business/Management from the University of Wyoming, as well as both a Masters in Tax Laws and a Juris Doctorate from Georgetown University Law Center. Jennifer has mostly worked in public accounting firms, including Ernst & Young and Deloitte. She is passionate about helping provide people and businesses with valuable accounting and tax advice to allow them to prosper financially. Jennifer lives in Arizona and was recently named to the Greater Tucson Leadership Program.

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Texas Retirement Taxes

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Thinking about a retirement in the Lone Star State? Texas is a great place to retire, and its sheer size provides retirees with a wide selection when deciding where to settle down. There are big cities like Dallas, charming college towns like College Station, seaside beach towns like Galveston and the one-of-a-kind state capital, Austin.

The low tax rates in Texas are another reason to retire in the Lone Star State. There is no state income tax in Texas, which means Social Security retirement benefits and all other types of retirement income are tax-free. That can mean thousands of dollars a year in tax savings as compared with other states.

It isn’t all roses when it comes to taxes in Texas, however. As described in further detail below, Texas has some of the highest sales taxes and property taxes of any U.S. state.

Is Texas tax-friendly for retirees?

Yes. This is largely because it does not have an income tax. As a result, Social Security retirement benefits, pension income, retirement account income and all other forms of retirement income are not taxed at the state level in Texas.

The Lone Star State’s friendly retirement income tax laws, along with its low cost of living, can compensate for other taxes that may put a dent in a senior’s budget. Sales taxes in Texas are over 8% (on average). The average effective property tax rate is 1.86%. This is sixth highest in the United States.

Is Social Security taxable in Texas?

No. Social Security benefits are not taxed by the state of Texas. If you have other income in addition to Social Security, however, it may still be subject to federal income taxes.

Are other forms of retirement income taxable in Texas?

No. Whether you have income from a 401(k), a pension or an IRA, Texas will not tax your retirement income. Likewise, if you plan on working part-time during retirement, Texas will not take your work income. Texas is an especially good location for those planning on such a “worktirement,” as it has a relatively low unemployment rate.

Photo credit: ©iStock.com/Yuri_Arcurs

How high are property taxes in Texas?

Very high. The average effective property tax rate in Texas is 1.86%. This is the sixth highest average in the U.S. That means a typical homeowner in Texas can expect to spend about $1,860 in annual property taxes for every $100,000 in home value.

Despite those high property taxes, housing costs in Texas are below average. Overall, housing in Texas is right around the national average. The median home value is about $142,000. Seniors in Texas also benefit from a number of property tax relief programs.

What is the Texas age 65 or older exemption?

All Texas homeowners who use their property as their principal residence can claim the Texas homestead exemption. This exempts at least $25,000 of the property’s appraised value from taxation. Seniors age 65 and older can claim an additional exemption of $10,000. At the state average property tax rate of 1.86%, both exemptions would equal annual savings of $651.

How high are sales taxes in Texas?

Very high. The state sales tax rate in Texas is 6.25% and local rates can be as high as 2%. The average rate Texans can expect to face is about 8.2%. This is the 12th highest in the U.S.

While those high rates will certainly affect the budgets of retirees, there are several helpful exemptions. Groceries are not subject to sales tax in Texas. Prescription drugs and over-the-counter medicine are also exempt from sales tax.

What other Texas taxes should I be concerned about?

Texas does not have an estate tax or inheritance tax. The only other taxes that may affect your retirement budget are sin taxes. Texas has a number of sin taxes, including an 8.25% tax on alcoholic beverages and a tobacco tax of $1.41 per pack of cigarettes.

Calculate Your Retirement Taxes in These Other States

Most Tax Friendly Places for Retirees

SmartAsset’s interactive map highlights the places in the country with tax policies that are most favorable to retirees. Zoom between states and the national map to see the most tax-friendly places in each area of the country.

Rank City Income Tax Paid Property Tax Rate Sales Tax Paid Fuel Tax Paid Social Security Taxed?

Methodology To find the most tax friendly places for retirees, our study analyzed how the tax policies of each city would impact a theoretical retiree with an annual income of $50,000. Our analysis assumes a retiree receiving $15,000 from Social Security benefits, $10,000 from a private pension, $10,000 in wages and $15,000 from a retirement savings account like a 401(k) or IRA.

To calculate the expected income tax this person would pay in each location, we applied the relevant deductions and exemptions. This included the standard deduction, personal exemption and deductions for each specific type of retirement income. We then calculated how much this person would pay in income tax at federal, state, county and local levels.

We calculated the effective property tax rate by dividing median property tax paid by median home value for each city.

In order to determine sales tax burden we estimated that 35% of take-home (after-tax) pay is spent on taxable goods. We multiplied the average sales tax rate for a city by the household income after subtracting income tax. This product is then multiplied by 35% to estimate the sales tax paid.

For fuel taxes, we first distributed statewide vehicle miles traveled to the city level using the number of vehicles in each county. We then calculated miles driven per capita in each city. Using the nationwide average fuel economy, we calculated the average gallons of gas used per capita in each city and multiplied that by the fuel tax.

For each city we determined whether or not Social Security income was taxable.

Finally, we created an overall index weighted to best capture the taxes that most affect retirees. The income tax category made up 40% of the index, property taxes accounted for 30%, sales taxes 20% and fuel taxes 10%.

Sources: Internal Revenue Service, Social Security Administration, state websites, local government websites, US Census Bureau 2018 American Community Survey, Avalara, American Petroleum Institute, GasBuddy, UMTRI, Federal Highway Administration