You moved to Texas for no state income tax: what changes and what still catches people

The quick version for new Texans

Texas has no state income tax on individuals, so once you are a Texas resident your wages, business profit and investment income are taxed only at the federal level. What does not change right away is your old state's claim on the year you moved: most states with an income tax expect a part-year resident return covering income earned while you lived there, and some keep taxing income that comes from sources inside their borders. Meanwhile, property tax and sales tax take a bigger role in your budget, and your federal deductions may shift.

We at Hockaday CPA in Frisco work with many households who have relocated to Collin County and the northern Dallas suburbs from other states. The move-year return is one of the most common places I see mistakes, usually because people assume that moving to Texas ends every state obligation the day the truck is unloaded. This guide explains what changes, what does not, and the steps that make the first Texas year clean. It is general information; state rules vary, and a licensed CPA should review your own situation.

The state you left still gets a return

If you lived in a state with an income tax for part of the year, expect to file a part-year resident return there. It typically covers all income earned while you were a resident, and in many states it also covers income from sources in that state after you left. The exact rules, forms and allocation methods are set by each state, so the right approach depends on where you came from.

Keep records that establish when your residency changed: the closing or lease date on your Texas home, the date you sold or moved out of the old one, your Texas driver's license and vehicle registration, voter registration and where your mail and bank statements go. States with income taxes sometimes question whether a taxpayer really left, especially when the person still owns a home there or spends significant time there. Clear dates and a clean break make that conversation short.

• Date you moved out of the old state and into Texas
• Closing statements or leases for both homes
• Texas driver's license, vehicle registration and voter registration dates
• Income earned before and after the move, by source
• Any property, rental or business you kept in the old state

Income that can follow you from your old state

Some income keeps a connection to the state where it was earned. If you kept your old home and now rent it out, the rental income is usually taxable in that state, and you may need to file there as a nonresident each year. If you own part of a business that operates there, your share of its income may be taxable there too. A bonus or commission paid after the move for work done before it can raise allocation questions, and deferred compensation and stock awards have their own rules.

Remote work adds another layer. If you work from Texas for an employer in another state, check that your employer has updated your payroll records so the old state is no longer withholding tax unnecessarily. Over-withholding is not lost, but getting it back means filing a return to claim it. Each of these situations is manageable, but they need to be identified before the return is prepared, not after a notice arrives.

Your federal return changes a little too

Living in a state without an income tax changes one piece of your federal return if you itemize. According to the IRS, you may elect to deduct state and local general sales taxes instead of state and local income taxes, using either actual receipts or the IRS optional sales tax tables, and the IRS offers a sales tax deduction calculator to help. In a move year, you may have paid income tax to your old state for part of the year, so it is worth comparing which option gives the larger deduction.

State and local tax deductions are capped. The IRS currently describes a combined limit of $40,000, or $20,000 if married filing separately, subject to a modified adjusted gross income limitation that cannot reduce it below $10,000. Property taxes on your Texas home count toward that same limit. Whether itemizing beats the standard deduction depends on your mortgage, property tax, charitable giving and other items, and the answer can change in the year you buy a house.

One practical tip: if you think the sales tax option may help, keep receipts for larger purchases during the year. According to the IRS, you can deduct either your actual sales tax expenses or use the optional tables, and only records let you compare the two honestly. Your CPA can run both and use whichever is larger.

Planning your first Texas tax year?

If you moved this year or last, a short review now can prevent a notice from your old state later. Bring your move dates, last year's returns from both federal and state, and a list of anything you kept behind. Our first consultation is free, and we can tell you what the move-year filings involve before the deadline arrives.

Property tax becomes the number to watch

Texas funds much of its local government through property tax, and for many new residents it is the biggest adjustment. According to the Texas Comptroller, there is no state property tax; property taxes are local, assessed through the appraisal district in the county where the property is located. That makes the homestead exemption important. To qualify, the Comptroller says you must have an ownership interest in the home and use it as your principal residence, and you apply with your county appraisal district. The general deadline for filing is before May 1.

The Comptroller also states that school districts must offer a $140,000 residence homestead exemption, and an additional $60,000 exemption for homeowners who are 65 or older or disabled, with some local taxing units offering more. New homeowners sometimes miss the application in their first year, especially if they closed late in the year. If you are still house-hunting, our colleague's guide on going from unsure to approved to closed on a home walks through the buying side.

If you bring a business with you

Business owners have a few more moving parts. A company formed in another state may need to register to do business in Texas, or the owners may decide to form a new Texas entity, and either choice has legal and tax consequences worth discussing with a business attorney and a CPA. Texas businesses may have a franchise tax report to file even when no tax is due, and businesses that sell taxable goods or services generally need a sales tax permit and must collect and remit sales tax.

Employees bring their own checklist. A business that hires in Texas generally needs a state unemployment tax account with the Texas Workforce Commission, separate from any account it had in the old state, and payroll has to stop withholding the old state's income tax for people who now live and work here. These are routine steps, but missing them creates notices on both sides of the move. We handle payroll for clients and represent businesses in Texas Workforce Commission and Texas sales tax audits, and most of the problems we see in those audits trace back to registrations or classifications that were never set up correctly in the first year.

If you are self-employed, the absence of state income tax simplifies your estimated payments, which become federal only once you are a Texas resident. Our guide on quarterly estimated taxes explains how to size them. If your old state still has a claim on part of the year's income, you may also need estimated payments there for the move year.

Assumptions that cost new Texans money

The first is assuming there is nothing to file in the old state. The second is keeping a home in the old state as a rental without realizing it creates a nonresident filing there. The third is forgetting the homestead exemption in the first year of owning a Texas home. The fourth is assuming that because Texas has no income tax, overall taxes are automatically lower; for some households the combination of property and sales taxes narrows the gap more than expected. The fifth is losing the paperwork that proves when the move happened.

None of these are difficult to avoid with a little attention in the first year. Our guide on which tax records to keep and for how long explains how long to hold onto move-year documents, closing statements and records for any property you sell later.

Getting the move-year return right with us

When you work with our firm, we prepare the federal return and coordinate the part-year or nonresident returns for the state you left, so the income is allocated consistently across all of them. We look at whether itemizing makes sense in your first Texas year, remind you about the homestead exemption if you bought a home, and help set up estimated payments if you are self-employed. If your situation has become more complex with the move, our guide on signs your return has outgrown software may be useful.

Our office is in Frisco, and we serve individuals and business owners throughout the area. Call or use the form on our website to schedule a free consultation, and bring your move dates and last year's returns.

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