Texas retirement taxes: state income tax, Social Security, pensions and federal taxes

Summary

For many retirees the first fact about Texas is that there is no state income tax. That fact is correct and it is written into the state constitution, but it answers only one part of the tax question. Retirement income is still taxed by the federal government, a Texas homeowner still pays property tax to local governments, and everyday purchases carry sales tax. A sound comparison with another state looks at all of those together.

This guide explains what the absence of a state income tax covers, how federal income tax treats Social Security benefits, pensions and IRA withdrawals, how sales tax works, why franchise tax is not a retiree concern, and where the real costs sit. It then sets out the honest tradeoffs. Two companion guides cover the biggest local cost in detail: Texas property taxes and appraisal districts and the age 65 homestead exemption and school tax ceiling.

Key takeaways

• Texas has no individual income tax, and the constitution prohibits the legislature from imposing one, so Social Security, pensions, IRA withdrawals and investment income are not taxed by the state.
• Federal income tax still applies. Up to 50 percent of Social Security benefits can be taxable once income passes the base amounts, and up to 85 percent above the higher thresholds, as set out in IRS Publication 915.
• Federal deductions for age 65 and older include the additional standard deduction and, for tax years 2025 through 2028, a $6,000 enhanced deduction for seniors that phases out above $75,000 of modified adjusted gross income ($150,000 for joint filers).
• Property tax is local, not state, and is usually the largest tax cost for a Texas homeowner. Homestead exemptions lower taxable value and are not cash payments, and they do not freeze all taxes at 65.
• Sales tax is 6.25 percent at the state level, with local taxes up to 2 percent for a maximum combined rate of 8.25 percent.
• Franchise tax is a business tax and rarely affects a retiree unless they own a business entity.
• Compare Texas with another state using a real address: the actual tax bill and a dated insurance quote, not state averages.

Texas has no individual income tax

Texas does not tax the income of individuals. The ban is constitutional, not just a matter of current law. Article 8, Section 24-a of the Texas Constitution is titled Individual Income Tax Prohibited and says that the legislature may not impose a tax on the net incomes of individuals, including an individual's share of partnership and unincorporated association income. Because of that wording, a change would require a constitutional amendment and not only an ordinary vote of the legislature.

For a retiree, this means Texas does not levy a state tax on Social Security benefits, pension payments, withdrawals from traditional IRAs and employer retirement plans, annuity payments, interest, dividends or capital gains. There is no state return to file for those sources and no state withholding to elect. The Texas Comptroller of Public Accounts, which administers most state taxes, describes its work as collecting, processing, administering or overseeing taxes, fees and assessments, and its list of Texas taxes does not include a personal income tax.

The constitution does allow some other taxes on income-like or business activity. Article 8, Section 1 lets the legislature tax the incomes of corporations other than municipal corporations and impose occupation taxes. That is the basis for the franchise tax discussed below, and it is why a business or professional practice can owe Texas tax even though an individual does not owe tax on personal income.

What the missing income tax does not mean

No income tax does not mean no tax. The Comptroller states that Texas has no state property tax, which is also a constitutional rule: Article 8, Section 1-e says that no state ad valorem taxes shall be levied on any property in the state. Property tax in Texas is local. School districts, cities, counties and special districts set their own rates, and the Comptroller does not collect the tax or set rates. Local taxing units use the revenue for schools, streets and roads, police and fire protection and many other services.

Because local governments carry that load, a home in Texas is where the tax cost of living in the state usually shows up. A retiree with a modest income and a high-value house can pay far more in property tax than they would have paid in income tax in a state that taxes retirement income. A retiree with a large pension and a modest house may come out well ahead. The result depends on the household, which is why the guides on property tax and the age 65 exemptions matter as much as this one.

Sales tax is the other major piece. The Comptroller reports that Texas imposes a 6.25 percent state sales and use tax on all retail sales, leases and rentals of most goods, as well as taxable services. Local taxing jurisdictions, meaning cities, counties, special purpose districts and transit authorities, can also impose up to 2 percent sales and use tax, for a maximum combined rate of 8.25 percent. The Comptroller offers a Sales Tax Rate Locator that searches rates by address, and it publishes city, county, transit and special purpose district rate tables with local codes and effective dates. The combined rate at an address can therefore differ from the state rate alone, and it is the locator, not a regional average, that should be used.

Sales tax applies to purchases, so the amount a household pays depends on how much it spends on taxable goods and services. Retirees who spend most of their income on housing, healthcare and travel will see a different burden from those who buy more goods. Our arithmetic for a hypothetical household: at the 8.25 percent maximum combined rate, $20,000 of taxable purchases in a year would carry $1,650 of sales tax. That is an illustration of how the rate works, not an estimate for any particular person, and many household purchases may fall outside the taxable base.

Franchise tax is a business tax, not a retiree tax

The Comptroller describes the Texas franchise tax as a privilege tax imposed on each taxable entity formed or organized in Texas or doing business in Texas. It applies to entities, and it is reported by the entity on an annual report. The Comptroller's franchise tax page lists a no tax due threshold, and entities at or below the threshold simply file a Public Information Report or Ownership Report instead of paying tax.

For most retirees living on Social Security, a pension and personal savings, the franchise tax never comes into play. It matters if a retiree continues to run a business through a Texas entity, owns a rental property through a limited liability company, or holds a stake in a family business. In that case the entity may have a reporting duty even if no tax is due, and the owner should confirm filing requirements with the Comptroller or a tax professional. Missing a required report can lead to penalties and, under the Comptroller's notices, to forfeiture of the right to transact business.

How federal income tax still applies

Living in Texas does not change federal income tax. Federal tax applies to retirement income in every state, and the absence of a Texas income tax simply means there is no second layer on top.

Social Security benefits are the most common point of confusion. The IRS explains in Tax Topic 423 that your benefits will not be taxable unless the sum of your modified adjusted gross income plus one half of your benefits received in the tax year is more than the base amount for your filing status. If the only income you received during the year was your Social Security benefits, they may not be taxable and you may not have to file a return. If you have other income, such as pension payments or IRA withdrawals, part of your benefits can become taxable.

IRS Publication 915 for 2025 returns sets out the thresholds and the rule for how much is taxed. The base amounts are $25,000 if you are single, head of household or a qualifying surviving spouse, $32,000 if you are married filing jointly, and $25,000 if you are married filing separately and lived apart from your spouse for the whole year. Generally, up to 50 percent of benefits will be taxable. Up to 85 percent of benefits can be taxable if the total of one-half of your benefits and all your other income is more than $34,000 ($44,000 if you are married filing jointly), or if you are married filing separately and lived with your spouse at any time during the year. These thresholds are in the publication for the tax year shown, so confirm the current year before relying on them. Benefits are reported to you on Form SSA-1099, and taxable benefits are reported on Form 1040 or Form 1040-SR.

Pensions and annuities are also federally taxable. IRS Tax Topic 411 explains that if some contributions to your pension or annuity plan were previously included in gross income, you can exclude part of the distributions from income, and that the tax-free part is generally limited to your total cost, sometimes called your basis or investment in the contract. For payments from a qualified retirement plan, the IRS describes a simplified method for figuring the taxable and tax-free parts; nonqualified annuities use the general rule with life expectancy tables.

IRA withdrawals follow their own rules. According to IRS Tax Topic 451, distributions from a traditional IRA are fully or partially taxable in the year of distribution, and if you made only deductible contributions the distributions are fully taxable. Traditional IRA owners generally must start taking required minimum distributions when they reach age 73. The first RMD is for the year you reach 73, but you can delay it until April 1 of the following year; the IRS example is that someone who reaches 73 in 2024 must take the first RMD by April 1, 2025 and the second by December 31, 2025, so delaying means two taxable distributions in one year. The amount not withdrawn may be subject to an excise tax of 25 percent, or 10 percent if the RMD is timely corrected within two years, reported on Form 5329. Roth IRAs have no required withdrawals during the owner's lifetime. The age can change by law, so confirm the age that applies to your birth year with the IRS or a tax professional. Earnings on qualified Roth IRA distributions, such as those made after age 59½ and after the five-year period that begins with the first tax year for which a contribution was made, are not subject to tax. Because required distributions can push up other income and raise the share of Social Security that is taxable, the order in which a retiree draws from accounts is a federal planning question that applies in Texas just as it does elsewhere.

Two federal deductions are aimed at people 65 and older. For tax year 2025, the IRS says the additional standard deduction for age or blindness is $1,600, or $2,000 if you are also unmarried and not a surviving spouse, and you are considered 65 on the day before your 65th birthday. Separately, the enhanced deduction for seniors lets individuals age 65 and older claim an additional $6,000 for tax years 2025 through 2028, or $12,000 for a married couple if both spouses qualify. It phases out for taxpayers with modified adjusted gross income over $75,000, or $150,000 for joint filers, it is available whether or not you itemize, a married person must file jointly, and each claimant needs a valid Social Security number. It is claimed on Schedule 1-A of Form 1040. The IRS lists the 2026 basic standard deduction as $16,100 for single filers, $32,200 for married couples filing jointly and $24,150 for heads of household. Check the IRS figures for the year you are filing, and ask a tax professional how these deductions interact with your Social Security and IRA income.

The IRS also notes that you may ask to have additional tax withheld, or pay estimated tax during the year, if some of your Social Security benefits will be taxable. Texas has no state estimated tax for individuals, so the federal estimated payment is the only one a typical retiree faces.

Property tax and the over-65 rules in brief

Property tax is the largest tax a Texas retiree controls through the choice of where to live. The Comptroller explains that property tax is locally assessed and locally administered, and that all real and tangible personal property is taxable in proportion to its appraised value unless the Texas Constitution authorizes an exemption. Questions about an appraisal go to the local appraisal district, and the general deadline for filing an exemption application is before May 1.

For a residence homestead, the Comptroller reports that Tax Code Section 11.13(b) requires school districts to provide a $140,000 exemption, and that Section 11.13(c) requires school districts to provide an additional $60,000 exemption for a person who is age 65 or older or disabled. Any taxing unit may adopt additional local option exemptions. By the Comptroller's own example, a home appraised at $300,000 with a $140,000 school exemption is taxed for school purposes as if it were worth $160,000. Exemptions reduce taxable value; they are not cash payments, and they do not mean every property tax is frozen at age 65.

The over-65 benefits are conditional, they apply to a primary residence, and the owner must apply. Because the details, including the school tax ceiling and optional local ceilings, determine how much a particular household saves, they are covered separately in the guide on the age 65 homestead exemption and school tax ceiling. The mechanics of appraisal notices, protests and rate-setting are covered in Texas property taxes and appraisal districts.

Honest tradeoffs for a retiree

The case for Texas on taxes is real. A retiree with substantial taxable income from a pension, IRA withdrawals, investments or part-time work avoids a state income tax bill that would otherwise be due in many states. Retirees who rent or who own a modest home in a lower-rate taxing area may keep more of their income than in a state with income tax.

The case against is also real. Property tax is a recurring cost that rises with appraised value and with local rates, and homeowners pay it every year, including in retirement and including after a mortgage is paid off. Because local governments depend on it, rates vary by location and over time, and a home that has risen in value can be reappraised upward. The over-65 exemptions soften this cost but do not remove it. Sales tax adds up to 8.25 percent on taxable purchases.

Insurance is a second cost that is not a tax but belongs in the same budget. Homeowners near the Gulf Coast may face windstorm and flood coverage costs, and inland owners may face hail and wildfire exposure, so a low tax rate can be offset by a high premium. Any comparison of Texas with another state should be run on a specific house with a dated insurance quote and the actual property tax bill for that address, not on state averages. The Texas state overview lists the other major Texas decision points.

Related guides

• Texas property taxes and appraisal districts: how to compare actual total tax bills
• Texas homestead exemption, the age-65 exemption and the school tax ceiling