Texas Retirement Taxes: Navigating Your Financial Future in the Lone Star State

The Lone Star State is an attractive retirement destination for many due to its tax-friendly policies. It doesn’t have an income tax, does have senior property tax exemptions, and is among the states that do not impose state inheritance taxes. Getting ready to start your retirement? Here’s everything you need to know about retirement taxes in Texas to help you make an informed decision about your future financial planning. 

Is Texas Tax-Friendly for Retirees?

Texas offers an attractive mix of tax savings and low cost of living. Retirement income from Social Security benefits, pensions, and retirement accounts are not subject to state-level taxation in Texas. Whether your retirement income comes from a 401(k), pension, or IRA, Texas does not impose taxes on it.

Furthermore, Texas does not tax income for those who work part-time during retirement, making Texas an appealing choice for those considering an encore career. However, those with additional sources of income alongside Social Security may still be subject to federal income taxes.

Texas' tax-friendly laws for retirees, coupled with its low cost of living, can be a great way to help offset other taxes that may affect one’s budget. Living in Texas can be an excellent option for those wanting to maximize their savings. 

Are Property Taxes High for Seniors in Texas?

Texas has an average effective property tax rate of about 1.8%, which ranks as the seventh-highest rate in the United States. This number implies the typical homeowner in Texas can anticipate spending approximately $1,800 in annual property taxes for every $100,000 in home value. However, with a little bit of research, you can find places in Texas with low property taxes.

Despite the relatively high property taxes, housing costs in Texas are lower than the national average. Therefore, seniors can acquire a more spacious home for their money than in other states or experience more significant financial advantages if downsizing for retirement. Additionally, seniors in Texas can take advantage of several property tax relief programs designed to alleviate the burden of property taxes.

Senior Property Tax Freeze

Those aged 65 and over can “freeze” their school property taxes, providing a considerable benefit by capping the taxes assessed. This “senior freeze” is offered throughout the state, and in certain districts, it may also apply to county, city, or junior college district taxes.

The tax ceiling sets the year the homeowner turns 65, and while taxes may decrease if tax rates lower, they will never exceed the capped amount. The only scenario in which the property taxes would increase is if the owner makes significant improvements that substantially raise the property's assessed value.

The senior property tax freeze is a vital tax relief program for seniors, as school district taxes typically constitute a significant portion of a homeowner's property tax bill.

Senior Property Tax Deferral

Homeowners who are aged 65 or older, disabled homeowners, and disabled veterans have the option to defer property taxes under Section 33.06 of the Texas Tax Code. This option delays property taxes until the estate is settled or the property is sold, providing a benefit for individuals with a fixed income. However, it’s important to note these individuals will still pay their taxes in due course, plus interest, as the tax deferment is essentially a loan. 

The senior property tax deferral relieves the stress of finding ways to pay annual bills, allowing you to find more enjoyment in your retirement.

Texas Homestead Exemption for Seniors

The Texas homestead exemption allows every homeowner in the state to apply and takes $40,000 of taxable property value off your primary residence when your school taxes are calculated. So, for example, if your home’s assessed value is $200,000, you’ll pay taxes as if the assessed value was $160,000. Seniors in Texas can receive an additional $10,000 exemption, while disabled homeowners are also eligible for a $10,000 exemption. 

Additionally, certain taxing districts may provide even more exemptions to seniors—yet another way for them to save on their property taxes. Be sure to check with your local taxing authority to see if you live in one of these districts.

Are Sales Taxes High in Texas?

With a combined rate of almost 8.2%, it's no surprise that retirees in Texas may be feeling the pinch of sales taxes. This is especially true if they're buying items that aren't exempt from state and local sales taxes.

Items such as clothing, furniture, and electronics may be subject to taxes, depending on their location. Services like auto repairs and haircuts are also subject to sales taxes.

Fortunately, numerous exemptions can provide some financial relief for retirees in Texas. Groceries, prescription drugs, and over-the-counter medicines are exempt from sales taxes, meaning retirees can purchase these items without tax.

Overall, sales taxes can be relatively high in Texas, but there are exemptions and credits available that can help retirees manage their finances.

Texas Has No Inheritance or Estate Taxes

There is no inheritance tax in Texas. While federal estate taxes may still apply, Texas is among the states that do not impose state inheritance taxes. 

Additionally, there is no estate tax in Texas. The primary distinction between inheritance and estate taxes lies in who pays the tax. Inheritance tax is levied on the heir(s), whereas estate taxes are charged against the estate itself, regardless of who inherits the deceased individual's assets. 

The executor is responsible for filing a single estate tax return and paying the tax using the estate's funds. The estate tax is calculated based on the total value of the deceased individual's assets and is paid before any distribution is made to the beneficiaries. When someone passes away, the federal government evaluates the overall value of their assets and claims a specific percentage of the total value.

An estate tax is commonly called a "death tax" because it’s imposed when a person passes away. While several states require their residents to pay estate taxes, Texas residents are exempt from state estate and inheritance taxes. Therefore, Texas residents only need to consider their federal estate tax liability.

Enjoy a Tax-Friendly Retirement in Texas 

Texas is a great place to retire and enjoy a tax-friendly environment. Property taxes are low for seniors, sales taxes are average, and there is no inheritance or estate tax. With these factors, plus the warm climate and numerous recreational opportunities, it's no wonder many retirees are calling Texas home.