Well, after hours working. I got it all done. Hangouts can do it, but you need a google voice account for it to work. To set up a google voice account you need a real number to activate it, but once you do that, you can use just the new goggle voice number. Then you have to install the google voice app on your phone and then set hangouts as the default sms handler.
To make calls you need to install the hangouts dialer app. This will allow you to make calls out, bit not receive calls via hangouts. I still have not figured out how to receive calls via hangouts. By default, google voice is set to forward all calls to the real number you used to create the google voice number, but you can turn this off by going into setting in your GV account.
It's actually quite a jicky system, with settings all over the freaking place that need to be tweaked in 5 different places (Hangouts.com, Google voice website, gmail, hangouts app and GV app). But if you hold your tongue just right and get it all right, you can have free texting and calling (outbound) to US numbers.
Nobody seems to know how to make the app receive incoming calls, but hey, I got 75% of what I was after and that's better then nothing.