What Do I Need to File Unearned Income in Texas?
- Texas does not have a state income tax. Because of this, the state does not require you to file any forms when you have unearned income from sources such as investment earnings, capital gains or other sources of income, regardless of whether you received this income in connection with work you did or whether you received this income as part of an investment or retirement savings return.
- Because Texas does not have a state tax on investment income, you keep all of the money you make from your investment activities. Having more money means your investments grow faster and to a larger dollar amount than they otherwise would if you had been taxed on this money. In retirement accounts, this is a moot point, since retirement accounts normally defer the payment of income taxes anyway. However, you'll see a benefit when you start making withdrawals from your retirement account since your income isn't being taxed.
- You must file a state tax form when you receive an inheritance in certain circumstances. While you may not think of this as income, earned or unearned, the state regards it as taxable if the value of the estate exceeds the minimum federal threshold used to determine whether estate taxes are due. Basically, if you owe estate taxes at the federal level, you will need to file with the State of Texas.
- Since Texas does not tax unearned income, a traditional retirement account may be the most beneficial type of retirement account to own in this state. However, comparing net after-tax income potential from a traditional retirement account to a Roth IRA will help you better understand which type of retirement account is best for you. This is because the federal government does require you to pay income tax on all distributions from a traditional retirement account, but does not tax the distributions from a Roth account. If you expect the net after-tax income from a Roth account to be higher than a traditional retirement account, then the Roth account may be your best option, even though Texas doesn't tax traditional retirement account distributions.
