Tennessee does not have a state income tax on wages

Tennessee has no state income tax on wages or salaries. If you work in Tennessee or live there, you do not pay state income tax on the money you earn from a job. This is one of the few states with this rule, and it means your paycheck stays larger than it would in states that tax wages.

However, Tennessee does tax certain kinds of income that are not wages. The state taxes interest, dividends, and capital gains at a flat rate of 3.85 percent. This applies whether you live in Tennessee or just earned the money there. If you receive income from investments, savings accounts, or selling stocks, you may owe Tennessee tax on that money even though you pay no tax on your salary.

The wage tax exemption applies to all residents and to people who work in the state but live elsewhere. You do not need to file a separate form to claim it—it straightforward does not exist as a tax you owe.

Key Takeaways

  • Tennessee collects no state income tax on wages, salaries, or self-employment income from a job or business.
  • The state does tax investment income—interest, dividends, and capital gains—at 3.85 percent.
  • You do not need to file a state income tax return in Tennessee unless you have investment income to report.
  • Other Tennessee taxes include sales tax (9.55 percent statewide average), property tax, and excise taxes on gasoline and certain goods.

What income Tennessee does tax

Tennessee's 3.85 percent tax on investment income applies to interest earned in savings accounts, money market accounts, and certificates of deposit. It also applies to dividends paid by stocks and mutual funds, and to capital gains when you sell an investment at a profit. If you have a brokerage account, retirement savings outside a 401(k) or IRA, or bonds, you may owe this tax.

Retirement account withdrawals from a 401(k), 403(b), or traditional IRA are treated as wages for Tennessee tax purposes and are not taxed by the state. Distributions from a Roth IRA are also not taxed. Social Security benefits are not subject to Tennessee income tax either. This means many retirees in Tennessee pay no state income tax at all.

Self-employment income from running a business is not taxed as income in Tennessee. However, if your business generates interest or investment income, that portion is subject to the 3.85 percent rate.

How to report investment income to Tennessee

If you have investment income, you report it on Tennessee Form IT-103, the state's individual income tax return. You file this form only if you have income subject to the 3.85 percent tax—you do not file it for wages alone. The form is due the same day as your federal return, typically April 15, though you can request an extension.

You will need documentation of your investment income: 1099-INT forms for interest, 1099-DIV forms for dividends, and 1099-B or a brokerage statement showing capital gains. Your bank or investment company sends these forms to you by January 31 each year. Attach copies to your state return or keep them with your records if you file electronically.

If you have no investment income, you do not file a Tennessee income tax return. Many Tennessee residents never file one because all their income comes from wages.

Other taxes you pay in Tennessee

Tennessee makes up the revenue it does not collect from income tax through other sources. Sales tax is the largest: the statewide average is 9.55 percent, though it varies by county. Some counties add local sales tax on top of the state rate, so your actual rate depends on where you shop. Groceries are taxed at a lower rate (4 percent) than other goods.

Property tax in Tennessee is based on assessed home value and varies significantly by county. The state does not set a statewide rate; each county assesses and collects its own. You also pay excise taxes on gasoline (27.4 cents per gallon as of 2024), cigarettes, and alcohol. These taxes are built into the price you see at the pump or register.

If you own a vehicle, you pay an annual registration fee based on the vehicle's value and age. The fee decreases each year the vehicle gets older. Tennessee also taxes certain services, including telecommunications and utilities, though the rates and rules vary.

Who does and does not file a Tennessee return

You do not need to file a Tennessee income tax return if all your income is wages, salary, or self-employment income from a business. You also do not file if your only income is from a 401(k), IRA, Social Security, or pension. These income sources are not taxed by Tennessee.

You must file if you have interest income, dividend income, or capital gains. Even if the amount is small—a few dollars in savings account interest—Tennessee requires you to report it. If you have both wage income and investment income, you file the state return to report the investment portion.

If you worked in Tennessee but moved away, you do not owe Tennessee income tax on wages you earned there. However, if you earned investment income while a resident, you may still owe tax on it depending on when you left and how your income was structured. The safest approach is to contact the Tennessee Department of Revenue if you are unsure.

How Tennessee's no-wage-tax rule affects your finances

Because Tennessee does not tax wages, your take-home pay is larger than it would be in a state with income tax. A person earning $50,000 in Tennessee keeps all of it (minus federal tax and Social Security), whereas the same person in a state with 5 percent income tax would owe $2,500 to that state. Over a career, this difference compounds.

The trade-off is that Tennessee relies more heavily on sales tax and property tax. If you spend a lot or own property, you may pay more in total state and local taxes than you would in a state with income tax but lower sales tax. The actual impact depends on your personal situation: how much you earn, how much you spend, and whether you own a home.

For retirees, Tennessee's lack of income tax is often a significant advantage. Pension income, 401(k) withdrawals, and Social Security are not taxed, which can make retirement in Tennessee less expensive than in states that tax retirement income.

Frequently Asked Questions

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

No. If all your income came from wages, salary, or self-employment income from a business, you do not file a Tennessee return. You only file if you have interest, dividends, or capital gains to report.

Is my 401(k) withdrawal taxed by Tennessee?

No. Withdrawals from a 401(k), 403(b), traditional IRA, or pension are not subject to Tennessee income tax. Roth IRA distributions are also not taxed. You may owe federal income tax on these withdrawals, but Tennessee does not tax them.

What if I earned investment income but it was less than $100?

You still must report it on your Tennessee return. There is no minimum threshold—even small amounts of interest or dividends must be included. However, the tax owed on a small amount will be proportionally small.

Does Tennessee tax Social Security benefits?

No. Social Security benefits are not subject to Tennessee income tax. You do not report them on your state return, though you may need to report them on your federal return depending on your total income.

If I moved to Tennessee from another state, do I owe back taxes?

No. You owe income tax only to the state where you lived when you earned the income. Once you move to Tennessee, you owe no state income tax on wages going forward. If you have questions about income earned in a previous state, contact that state's tax department.