USA – TEXAS Law and Practice Contributed by: Perrin Clark, Ytterberg Deery Knull LLP
1. Tax 1.1 Tax Regimes Income Tax
relatively abbreviated set of tax brackets. See the dis - cussion regarding applicable US federal exemptions and exclusions in 1.2 Exemptions . No state or local transfer taxes are assessed in Texas; therefore, individuals, estates, trusts and foundations in Texas are only subject to US transfer taxes. Property Tax Generally, no federal tax is assessed on the ownership of real property. While Texas has no state property taxes, local govern - ments in Texas (ie, counties and cities) do assess and collect property taxes. These are ad valorem taxes, meaning they are assessed based on the value of the property. These taxes can be assessed on both real property and business personal property. The local government sets the tax rate and assesses the value of the property as of 1 January of the tax year, which value is then used to compute the tax due. There are a number of important property tax exemptions or special rules, including without limitation: • the residential homestead exemption for a property owner who occupies the property as their principal residence (which provides a partial exemption that removes part of the homestead’s value from taxa - tion); and • the agricultural appraisal for agricultural land (which can significantly lower a property’s assessed value). Generally the effective property tax rate is between 1% and 2%, depending on the tax jurisdiction. Indi - viduals, estates and trusts in Texas are subject to these property taxes. Foundations may qualify for an exemption from property taxes. Sales and Use Tax Generally no federal tax is assessed on sales or use of goods. Texas usually assesses sales and use tax at a rate of 8.25% on sales, leases and rentals of goods, as well as the purchase of certain services. No sales tax is imposed on the sale of real estate in Texas.
The United States assesses federal tax on the world - wide income of its citizens and residents, as well as on the US-sourced income of non-resident aliens, subject to income tax treaties that exist with many countries. Accordingly, individuals, estates and trusts in Texas are subject to US federal income tax. Federal tax on ordinary income is assessed on a graduated scale, with marginal rates ranging from 10% to a top rate of 37%. Federal tax on income from long-term capital gains and qualified dividends is generally assessed at a rate of 20%. Individuals may be subject to an addi - tional 3.8% tax on the lesser of their net investment income or the amount by which their modified adjust - ed gross income exceeds certain thresholds. While private charitable foundations (hereafter referred to as “foundations”) are generally exempt from federal income tax, a variety of taxes, including significant excise taxes, can apply to foundations in specific cir - cumstances. No state or local income taxes are assessed in Texas; therefore, individuals, estates, trusts and foundations in Texas are only subject to US federal income tax. Transfer Tax The United States assesses federal tax on transfers by its citizens and non-citizen domiciliaries, as well as on transfers of US situs property by non-citizen non-domiciliaries, including gift tax, estate tax, and generation-skipping transfer tax. (Being a lawful per - manent resident of the United States, that is, holding a “green card”, arguably is evidence that a person is a non-citizen domiciliary.) Accordingly, such per - sons living in Texas are subject to US transfer taxes. Gift tax is assessed on gratuitous transfers (ie, on gifts or transfers without consideration). Estate tax is assessed upon assets owned by a decedent at their death. Generation-skipping transfer tax is generally assessed upon gratuitous transfers, either during lifetime or at death, to descendants more than one generation removed from the transferor and persons more than 37.5 years younger than the transferor. Each of these taxes is assessed at a rate of 40%, though the assessment of estate tax is subject to a
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