What Is Income Tax?
Simply put, income tax is any tax on income, whether for an individual or a business. The Internal Revenue Service (IRS) collects federal income taxes at the behest of the U.S. government, while states and local governments can set their own income tax laws independently.
- Specific tax rates differ, often increasing with income.
- Taxable income refers to the amount of revenue that can be taxed, lowered by certain deductions set by the taxing entity.
- Individual or personal income taxes paid to the federal government usually come out of a person’s paycheck, but those who are self-employed may pay estimated taxes instead.
- Business income tax rates are based on a company’s total earnings, reduced by the operating costs and other capital expenses.
- Corporations, small businesses and independent contractors all pay business income taxes.
- Tax returns must be filed yearly.
As you may have guessed, not all states impose income taxes on their citizens, including Texas.
What Is Property Tax?
Property tax is any tax imposed on different forms of property owned by individuals, corporations or other legal entities. The federal government does not collect property taxes, but states do. However, most property tax rates are determined by local governments within each state, rather than the state itself.
- The tax rate is calculated by the local government where the property is located, which could differ from where the owner primarily resides.
- The current value of the property, usually determined by an appraiser, dictates the amount the owner must pay.
- Typically, property tax refers to land and other structures that do not move, such as homes or buildings.
- However, personal property taxes may be imposed on certain movable items, often vehicles, such as cars, boats and airplanes — this could be part of a vehicle’s license and registration fees.
- Property taxes pay for community services based on the needs of each locality.
At this point, the difference between income tax vs. property tax should be pretty clear. They’re both taxes you (may) have to pay, but one is for your income, while the other is for the things you own.
What Does This Mean for Texas?
If you’re a Texas resident, you may be wondering how income tax and property tax should factor into your financial planning. Below, you can see a breakdown of how these taxes might impact you.
Income Taxes in Texas
As mentioned before, this one is pretty easy: there is no individual income tax in Texas! However, you’ll still need to file your federal income tax return just like everyone else. Additionally, business income taxes do exist in the Lone Star State, known as a “Franchise Tax,” but it’s relatively forgiving. The highest rate is 1% on total earned revenue, and that’s for large businesses making over $10 million.
Property Taxes in Texas
On the other hand, Texas property taxes absolutely exist. In fact, the average tax rate in Texas is almost .8% higher than the national average. That said, it isn’t the state itself imposing these taxes — the Comptroller does not collect property tax or set any rates. It’s the local taxing units that do, and they use the money to invest in local services, from schools and streets to police and fire departments. An appraiser calculates the property tax rates by evaluating the taxable property within a county, determining its value and comparing that to the needs of the area. The rates don’t often change too much between years, though.
So, Are Texas Taxes Good or Bad?
Frankly, it’s a matter of opinion. There is no individual income tax, but property taxes tend to be fairly high. Ultimately, this gives Texas a reputation as being good for business. But for individuals? It might be a different story. The onus of paying property taxes is on each person individually, due on January 31st every single year. For many people, it can be hard to get all of the finances and paperwork in order. If that’s the case, you could be looking at delinquency.