Colorado taxes personal income at a flat 4.40%; Texas has no state income tax at all. That is the headline when comparing Colorado vs Texas income tax, and for a high earner it usually settles the question in Texas’s favor. For a middle-income homeowner, the comparison is closer than it looks, because Texas funds its government through property and sales taxes that run well above Colorado’s.
The Two Rates, Side by Side
Colorado applies a single 4.40% rate to the federal taxable income of every individual, estate, and trust for the 2026 tax year.1Justia Law. Colorado Revised Statutes Section 39-22-104 (2024) Someone earning $50,000 and someone earning $500,000 pay the same percentage. Because the starting point is federal taxable income, the deductions you already took federally carry through, though Colorado requires certain add-backs (such as interest from non-Colorado municipal bonds) and allows certain subtractions before you arrive at the state figure.
The 4.40% rate can dip lower in strong revenue years. Colorado’s Taxpayer’s Bill of Rights, or TABOR, requires the state to refund revenue collected above its spending limit, and one of the refund mechanisms is a temporary cut to the income tax rate.2Department of Revenue – Taxation. TABOR Whether that triggers in any given year depends on actual collections.
Texas imposes no personal income tax, and its constitution requires any attempt to create one to pass a statewide voter referendum, with revenue restricted to reducing school property taxes.3Justia Law. Texas Constitution Art 8 – Sec 24 Texas residents file no state income tax return and track no state-specific deductions. The administrative simplicity is real.
Where Texas Takes the Money Back
State government has to be funded somewhere, and in Texas that burden shifts onto homeowners and shoppers.
Texas has one of the highest effective property tax rates in the country, roughly 1.36% of a home’s assessed value. Colorado’s effective rate sits around 0.50%. On a $400,000 home, that gap alone runs about $3,440 a year. Texas softens this with a homestead exemption: school districts must exempt $140,000 of a home’s appraised value from taxation, and local taxing units can add further exemptions of up to 20% of a property’s value.4Texas Comptroller. Property Tax Exemptions Even after the exemption, most Texas homeowners pay considerably more property tax than they would on a comparable Colorado home.
Sales tax follows the same pattern. Texas charges 6.25% at the state level, with local add-ons pushing the combined rate to roughly 8.20% on average. Colorado’s state sales tax is 2.90%, with local jurisdictions adding more depending on where you live.5Department of Revenue – Taxation. Sales Tax Rate Changes
The practical takeaway: for high earners who spend a modest share of income on housing and consumption, Texas almost always wins on total tax burden. For middle-income homeowners whose property tax bill is a large share of their total tax picture, the gap narrows and can even flip.
Retirees Should Look Twice at Colorado
Colorado’s rules for retirement income changed meaningfully for 2026. Under SB25-136, Colorado removes all caps on the pension and annuity subtraction starting with the 2026 tax year. Any individual, regardless of age or income, can subtract the full amount of pension and annuity income from state taxable income, provided it was included in federal taxable income. The old cap of $20,000 or $24,000 depending on age is gone.
Social Security has its own subtraction. At 65 or older, you can deduct all federally taxed Social Security benefits from your Colorado return. Between 55 and 64, the full subtraction is available up to income thresholds of $75,000 for single filers and $95,000 for joint filers; above those, the subtraction drops to $20,000.
Texas, of course, taxes none of this. But with Colorado’s pension subtraction now uncapped, a retiree whose income is mostly pension and Social Security may owe little or nothing to Colorado. The retirement gap between the two states is narrower in 2026 than it has ever been.
Business Owners and Freelancers
Colorado’s 4.40% rate applies to pass-through business income — sole proprietorships, partnerships, and S corporations.1Justia Law. Colorado Revised Statutes Section 39-22-104 (2024) Business profit flows to your personal return and is taxed at the same rate as wages. There is no preferential bracket for entrepreneurs.
Texas doesn’t tax personal business income, but it does impose a franchise tax on most business entities. The rate is 0.75% of taxable margin for most businesses, or 0.375% for retailers and wholesalers.6Texas Comptroller. Franchise Tax Businesses with total revenue at or below $2,650,000 owe nothing.7Texas Comptroller of Public Accounts. 2026 Texas Franchise Tax Report Information and Instructions Sole proprietorships owned by natural persons are generally exempt from the franchise tax, so a freelancer operating as a sole proprietor in Texas truly pays no state-level tax on business income.
For a solo freelancer, the contrast is simple: Colorado takes 4.40%, Texas takes nothing. For an LLC or corporation above the revenue threshold, the Texas franchise tax is calculated on margin (revenue minus certain costs) rather than net income, so a high-revenue, low-margin business can still owe meaningful state tax in Texas. For most small businesses, though, the franchise tax burden is lighter than Colorado’s income tax.
Capital Gains Get No Break in Colorado
Colorado taxes capital gains at the same 4.40% flat rate as ordinary income. There is no preferential state rate for long-term gains, and the broad capital gain subtraction that used to exist was eliminated for most taxpayers starting in 2022. The only remaining subtraction applies to farmers selling agricultural real property, which requires filing a Schedule F, holding the land for at least five years, and having no overdue state tax debts.8Department of Revenue – Taxation. Income Tax Topics: Colorado Capital Gain Subtraction
If you’re sitting on a large unrealized gain and considering a move, timing matters. Selling after establishing Texas domicile eliminates state tax on the gain entirely. Selling while still a Colorado resident means the full gain is taxed at 4.40%, and because Texas imposes no tax on the other end, there is no credit to claim.
Residency Is Where People Get Caught
Colorado considers you a resident in one of two ways. First, if you’re domiciled in the state, meaning Colorado is your permanent home and you intend to stay. Second, you become a “statutory resident” if you maintain a permanent place to live in Colorado and spend more than six months of the year there in total. The regulation defines “permanent place of abode” broadly, including rented apartments, employer-provided housing, and recreational vehicles with sleeping and cooking facilities.9Colorado Secretary of State. 1 CCR 201-2 – Income Tax Once you qualify, Colorado taxes your worldwide income at 4.40%.
Texas looks at physical presence combined with intent to make the state your permanent home. Because Texas has no income tax to enforce, the practical importance of Texas domicile is defensive: it protects you from other states trying to claim you as a resident. Concrete steps help prove it — a Texas driver’s license, voter registration, a primary residence you own or lease, and financial accounts in the state.10Department of Public Safety. Texas Residency Requirement for Driver Licenses and ID Cards
Moving Between the States Mid-Year
If you relocate during the year, Colorado treats you as a part-year resident. You owe Colorado tax on income earned while you were a Colorado resident, plus any Colorado-source income from the non-resident portion of the year. You compute your tax as if you were a full-year resident and then multiply by an apportionment percentage reflecting the share of income subject to Colorado tax.11Colorado Department of Revenue – Taxation. Income Tax Topics: Part-Year Residents and Nonresidents Moving from Colorado to Texas mid-year can produce real savings for the remaining months, but Colorado will still tax any Colorado-source income after you leave, and you need to cleanly establish Texas domicile — not simply move physically — to shut the door on a full-year residency claim.
Remote Workers Crossing State Lines
Colorado taxes non-residents on income from Colorado sources. If you live in Texas but travel to Colorado for client work, pay for those specific days is taxable by Colorado.12Legal Information Institute. Colorado Code 39-22-109 – Colorado-Source Income Source is based on where you physically perform the work, not where your employer sits.
The reverse offers no relief. A Colorado resident working remotely for a Texas employer owes the full 4.40% to Colorado. Colorado residents who earn income in another state can normally claim a credit for taxes paid to that other state to prevent double taxation.13Legal Information Institute. Colorado Code 39-22-108 – Credit For Taxes Paid to Another State Since Texas charges nothing, there is no credit to claim. Every dollar from a Texas employer gets taxed at the full Colorado rate.
For people splitting time between the two states, careful recordkeeping is what keeps surprise bills (and non-filing penalties) off the table. If you live in Texas and occasionally work in Colorado, track those Colorado days and file a non-resident return. If you live in Colorado and occasionally work in Texas, expect no break on those days.