Texas
Texas state tax preparation
Texas has no personal income tax, which simplifies life for individuals. But Texas businesses still face the franchise tax (margin tax), and Texas residents with income from other states still need multi-state filings. We handle both.
How does Texas state taxation work?
Texas has no state personal income tax. Texas residents file federal returns only for personal income tax purposes. State revenue is collected through sales tax (state plus local), property tax (the highest in the country in many counties), and the Texas franchise tax, which applies to most LLCs, partnerships, and corporations doing business in Texas.
What is the Texas franchise tax (margin tax)?
The Texas franchise tax, often called the "margin tax," applies to most LLCs, partnerships, and corporations registered to do business in Texas. It is levied on the entity's "margin," calculated as the lower of:
- Total revenue minus cost of goods sold (COGS)
- Total revenue minus compensation
- Total revenue times 70 percent
- Total revenue minus $1 million (only for entities with revenue at or below the no-tax-due threshold)
Margin is then multiplied by the applicable rate (0.375 percent for retail/wholesale, 0.75 percent for most other businesses).
Entities with annual revenue at or below the no-tax-due threshold ($2.47 million for 2024 reports, increasing periodically) owe no franchise tax but still must file an information report. Entities above the threshold owe tax based on the margin calculation.
What if a Texas resident has income from other states?
Texas residents with income from states with personal income tax (California, New York, etc.) still need nonresident state returns in those states. Without a Texas income tax, there is no home-state credit-for-taxes-paid mechanism, the nonresident state's tax is simply paid as the only state tax on that income.
Common scenarios: Texas residents with rental property in California, Texas business owners with K-1 income from out-of-state partnerships, and Texas residents who work temporary assignments out of state.
See multi-state returns for the process.
What does Texas residency get me, tax-wise?
Texas residency means no state income tax on wages, business income, capital gains, retirement distributions, or any other personal income. For high earners, this can be a meaningful savings versus a high-tax state.
However, residency must be genuinely established. The state you are leaving (especially California or New York) may challenge a residency move that lacks supporting evidence. Documentation: driver license, voter registration, primary home, employment, family location, professional advisors, days of physical presence.
Texas residents who maintain significant ties to a former state (continued employment, retained homes, family) can be challenged on residency. The cleanest moves are documented over a full year with consistent factual evidence.
Texas tax FAQs
Do I need to file a Texas state income tax return?
No. Texas does not have a personal income tax, so individuals do not file a state income tax return. The federal return covers all personal income tax obligations.
Does my Texas LLC owe franchise tax even if it had no income?
Texas LLCs (and partnerships and corporations) doing business in Texas must file an annual franchise tax report. If revenue is at or below the no-tax-due threshold ($2.47 million for 2024 reports), no tax is owed but a no-tax-due report is still required. Failure to file results in administrative forfeiture of the entity's right to do business in Texas.
How does Texas franchise tax compare to other states?
Texas franchise tax applies on margin (a measure between revenue and net income) at relatively low rates (0.375-0.75 percent). For service businesses with high revenue and modest margin, the tax is typically modest. For high-revenue businesses with thin margins, the calculation matters more.
Can I claim a credit for Texas franchise tax on my federal return?
Texas franchise tax is generally deductible as a state and local tax on the federal entity return (1065 or 1120-S). It is not a federal credit; it reduces federal taxable income through the deduction.
What about sales tax in Texas?
Texas has a 6.25 percent state sales tax, plus local sales taxes (city and county) up to 2 percent additional, for a maximum 8.25 percent combined rate. Sales tax compliance is a separate engagement (we coordinate with sales tax services where needed but do not file Texas sales tax returns directly).
How do Texas residents handle income from a California job?
California uses a physical-presence rule for sourcing wages. If a Texas resident performs work for a California employer entirely from Texas, no California return or tax is owed. If the Texas resident performs work in California (visits, meetings, conferences), wages for those days become California-source and require nonresident filing in California.
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