Texas has no state income tax. If you live in Texas, you may pay high property taxes and sales tax of 8.25 percent. Texas collects fees for automobile registration and yearly inspections, and the school districts are independent, with school taxes added to the property tax. You do not pay a direct income tax on your Social Security benefits at the state level in Texas. You pay indirectly with purchases and property ownership.
Tax Friendly to Retirees
Although Texas has no income tax, it does not rank in the tax-friendly states for retirees by most standards. This is because 35 states do not tax Social Security benefits. Only nine states have no state income tax, according to the Kiplinger website. With the majority of states not taxing Social Security benefits, the answer to tax-friendly states for retirees lies in the property taxes and sales taxes. Inheritance and estate taxes make a difference to your heirs.
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If you own property in Texas, you may receive a $15,000 exemption for your residence or homestead. Once you reach 65, you may receive another $10,000 exemption. You also receive a tax freeze on school district taxes once you reach 65. Unless you make improvements to your homestead, you enjoy the old tax rate for your property or ad valorem taxes. Some counties, cities and towns also impose a tax freeze for seniors at age 65.
The basic state sales tax in Texas in 2011 is 6.25 percent, and other taxing districts may add as much as 2 percent to the total. No sales tax exists for food purchased for home cooking, but the taxing units tax hot food and restaurant food. The state rate plus the local rate combine for taxation of nonfood items except for drugs; Texas has no tax on prescription and nonprescription drugs. Cigarette tax is $1.41 a pack and state gasoline tax is 20 cents a gallon in 2011.
Inheritance and Estate Taxes
Texas eliminated inheritance tax in 2005. Estate tax follows federal guidelines, so you may have a large estate without taxation in Texas. With no state income tax, Texas does not tax your pension or other sources of income while you enjoy your retirement years. Austin, the state capital, is quickly becoming one of the premier retirement locations in the country, reports the Top Retirements website. "Kiplinger Personal Finance" magazine rated Austin number one best city for the next decade in 2010. With a warm climate and wide-open spaces, Texas welcomes retirees of all ages.
If your income exceeds $25,000 as an individual or $32,000 as a married person filing jointly, you may owe federal income taxes on your Social Security. The tax above this level starts at 50 percent taxation of Social Security benefits. Whatever state you choose for your retirement years, you may pay federal taxes on your Social Security benefits if you have other income.
- Kiplinger: Retiree Tax Guide to Texas
- Top Retirements.com: Austin: Texas
- "Kiplinger's Personal Finance" magazine; Best Cities 2010: Austin, Texas; Bob Frick; July 2010
- Retirement Living Information Center: Taxes by State -- Texas
- IRS.gov: Publication 915 -- Social Security and Equivalent Railroad Retirement Benefits
- State of Texas Office of the Comptroller: Overview of Texas Taxes
- Retirement Places Report: Best Places to Retire -- Texas