Moving to Texas: The Federal Tax Issues Nobody Warns You About

Every year, a lot of people move to DFW from California, Illinois, New York, and everywhere else with a state income tax. They do the math on the state savings. It is real. But the move itself has federal tax consequences, and those are the ones that turn up later as IRS letters.

This guide covers the federal side. Your former state may still claim you as a resident for part or all of the year, and that is a state law question for a professional licensed in that state. What follows is what the IRS cares about.

Moving expenses are not deductible for most people

Before 2018, a job-related move could produce a federal deduction for moving costs. That deduction is gone for most taxpayers. IRC 217(k) suspends it for taxable years beginning after 2017, and 2025 legislation made that suspension permanent rather than temporary.

Two groups keep the deduction. Active duty members of the Armed Forces moving under military orders for a permanent change of station still qualify under IRC 217(g). Starting with 2026 tax years, certain employees and new appointees of the intelligence community who relocate for a change in assignment are treated the same way.

For everyone else, there is a second consequence. If your employer pays for your move or reimburses you, that amount is generally taxable wages now, because the exclusion for qualified moving expense reimbursements is suspended too. Look at your W-2. If the relocation package is in Box 1, it was supposed to be. If you received a lump sum relocation payment and nothing was withheld on it, your withholding for the year may be short.

Your old state's tax refund on Form 1099-G

Texas does not issue state income tax refunds, but your former state might, for the year you left. The state reports that refund on Form 1099-G, and the IRS gets a copy.

Whether it is taxable depends on the tax benefit rule in IRC 111. If you deducted state income taxes on Schedule A in the year you paid them and received a tax benefit from the deduction, the refund is generally taxable in the year you receive it, up to the amount of the benefit. If you took the standard deduction that year, the refund is generally not taxable. The state and local tax deduction cap also limits how much of a refund can be taxable.

This trips up new Texans because the next year's return is the first one with no state income tax at all, and nobody thinks about the old state anymore. The 1099-G still arrives. The IRS still matches it.

Selling your old home

Most people moving to Texas sell a house somewhere else. IRC 121 excludes up to $250,000 of gain, or $500,000 for married couples filing jointly, if you owned and used the home as your principal residence for at least two of the five years before the sale.

Problems start when the old house does not sell right away. If you rent it out after moving, the exclusion can still apply as long as the two-out-of-five-year tests are met on the date of sale, but depreciation taken during the rental period is generally taxable when you sell. And if the house sits too long, you can lose eligibility entirely once you are outside the five-year window.

The closing agent typically issues a Form 1099-S. Even when the gain is fully excluded, report the sale if you received a 1099-S. An unreported 1099-S is a standard trigger for a matching notice.

If your move was for a new job and you do not meet the two-year test, a reduced exclusion may still be available under IRC 121(c) for a sale due to a change in place of employment. The reduced amount is prorated.

Estimated taxes and withholding in your first Texas year

Here is a quiet trap. In a high-tax state, your employer withheld state income tax and federal income tax. When you move to Texas, the state withholding disappears and your take-home pay goes up. Your federal withholding may not have been designed for the new picture, especially if you changed jobs mid-year or took a relocation bonus.

Self-employed people face the same issue from the other direction. Quarterly federal estimated payments were sized to last year's income. A move often changes income, deductions, or both.

The penalty for underpaying estimated tax under IRC 6654 is avoidable with the safe harbors: generally paying in at least 90 percent of the current year's tax or 100 percent of the prior year's tax, or 110 percent if your prior year adjusted gross income exceeded $150,000. A W-4 update in your first month in Texas costs less than a penalty in April.

Tell the IRS where you live now

The IRS sends legally significant notices to your last known address. That includes notices of deficiency, notices of intent to levy, and Collection Due Process notices. If a notice goes to your old address, the deadlines it starts generally still run. Filing a return with your new address updates your record, but that may be months after the move.

File Form 8822, Change of Address, as soon as you move. Businesses use Form 8822-B for changes to the business address or responsible party. If you already owe the IRS or have an open audit, this is not optional in any practical sense. Missing a notice of deficiency because it went to Sacramento can cost you your right to go to Tax Court before paying.

If you brought an IRS problem with you

A move to Texas changes nothing about an existing federal tax debt. The collection statute keeps running, liens filed in your old county stay on record there, and the IRS updates your address and reassigns your case. A federal tax lien can also be filed in your new Texas county. My guide on where the IRS files liens in Texas explains how that works.

Some people hope Texas law will protect them from collection. Texas homestead and exemption laws are generous against private creditors, but they do not stop the IRS. And moving assets around before or during a move while you owe can create bigger problems than the debt itself.

The no-income-tax lifestyle is real. So is federal tax. If you moved here with unfinished IRS business, or the move created some, let's talk: 813-229-7100.