Tennessee has no state income tax on wages or salaries

Tennessee does not tax the money you earn from a job. There is no state income tax on wages, salaries, or self-employment income. This applies whether you work for an employer, run your own business, or both. If you live and work in Tennessee, you will not owe state income tax on what you earn.

Tennessee is one of nine states with no income tax on earned income. This means your paycheck is not reduced by a state income tax withholding, and you do not file a state income tax return based on wages. However, Tennessee does tax other forms of income, and the state collects revenue through other taxes instead.

Key Takeaways

  • Tennessee does not tax wages, salaries, or self-employment income from work.
  • Tennessee taxes investment income, including dividends and capital gains, at a rate of 3.85 percent.
  • The state relies on sales tax, property tax, and other sources instead of income tax on wages.
  • If you move to Tennessee from another state, you do not owe back income tax to Tennessee on wages you earned elsewhere.

What income Tennessee does tax

While Tennessee does not tax wages, it does tax certain types of investment income. The state taxes dividends and capital gains at a flat rate of 3.85 percent. This applies to money you make from selling stocks, bonds, mutual funds, or other investments, and to dividends paid by companies you own shares in.

If you receive income from investments held in Tennessee or elsewhere, you may owe Tennessee tax on that income. The tax applies to Tennessee residents and to nonresidents who earn investment income from Tennessee sources. You report this income on a separate state form, not on your federal return.

Other types of income, such as interest from savings accounts and money market accounts, are not taxed by Tennessee. Retirement income, including Social Security and pension payments, is also not subject to state income tax in Tennessee.

How Tennessee funds state government without income tax

Tennessee makes up the revenue it does not collect from income tax through sales tax and other sources. The state sales tax rate is 9.55 percent when you combine the state rate with local taxes, though the exact rate varies by county. This is one of the highest sales tax rates in the nation.

Tennessee also collects property tax, though the rate is lower than in many other states. The state taxes gasoline, cigarettes, alcohol, and other goods. Business taxes, licensing fees, and other revenue sources also support state operations.

Because Tennessee relies heavily on sales tax, residents pay tax on most purchases. This means the tax burden falls more on spending than on earning, which benefits people with high incomes and affects people who spend most of what they earn.

What happens if you move to or from Tennessee

If you move to Tennessee from a state that has income tax, you do not owe Tennessee income tax on wages you earned in your previous state before you moved. Your old state may still tax that income, depending on when you left and how that state's rules work, but Tennessee will not.

Once you become a Tennessee resident, you owe Tennessee tax on investment income you earn, regardless of where you live or where the investment is located. If you move away from Tennessee, you stop owing Tennessee income tax on wages, but you may still owe tax on investment income earned while you were a resident, depending on the timing and your new state's rules.

Residency for tax purposes is usually determined by where you live on December 31 of the tax year. If you move mid-year, you may be considered a resident of both states for that year, and both may tax you on income earned while you lived there.

Investment income and how to report it

If you earn investment income in Tennessee, you report it on Form INC, the Tennessee Excise Tax Return on Certain Investments. This form is separate from any federal tax return you file. You file it with the Tennessee Department of Revenue.

The form asks for details about the dividends and capital gains you earned during the tax year. You will need records from your brokerage account, mutual fund statements, or other investment sources showing what you earned. The important date to file is usually the same as the federal income tax important date, April 15, though extensions are available.

If you owe tax, you pay it along with the form. If you overpay, you can request a refund. Many people use a tax preparer or software to complete the form, especially if they have multiple investments or complex transactions.

Retirement income and Social Security

Tennessee does not tax Social Security benefits, pensions, or other retirement income. This includes income from 401(k) plans, individual retirement accounts (IRAs), and annuities. If you are retired and living on these sources of income, you owe no Tennessee state income tax on them.

This rule applies to all retirees, regardless of how much retirement income they receive. It also applies to people who retire early and begin drawing from retirement accounts before age 59½. The exemption makes Tennessee attractive to retirees, since they can keep more of their retirement savings.

However, if a retiree also earns investment income from dividends or capital gains, that investment income is still subject to the 3.85 percent tax. Wages from part-time work are not taxed, but investment returns are.

Frequently Asked Questions

Do I have to file a Tennessee tax return if I only earn wages?

No. If your only income is from wages or salary, you do not file a Tennessee state tax return. You may still need to file a federal return, depending on your income level and filing status, but Tennessee does not require a state return for wage income alone.

What if I earn money from a side business or freelance work?

Self-employment income from a business or freelance work is not taxed by Tennessee. You do not owe state income tax on this money. However, you still owe federal self-employment tax and federal income tax on the earnings. You may also owe local taxes depending on where your business operates.

Do I owe Tennessee tax on investment income if I live out of state?

If you are not a Tennessee resident, you generally do not owe Tennessee tax on investment income. However, if you earned the investment income while you were a Tennessee resident, you may owe tax on it depending on when you left the state. Check with the Tennessee Department of Revenue if you are unsure about your residency status.

Can I deduct Tennessee taxes on my federal return?

You can deduct state and local taxes (SALT) on your federal return, but only up to $10,000 per year. Since Tennessee has no income tax on wages, most Tennessee residents have little or no state income tax to deduct. You can deduct sales tax or property tax instead, whichever is larger.

What is the difference between Tennessee's investment tax and income tax?

Tennessee's investment tax applies only to dividends and capital gains, not to wages or salaries. Income tax, which other states use, applies to all earned income. Tennessee's approach means workers keep their full paycheck, but people who earn money from investments pay tax on those earnings.