Tennessee does not have a state income tax on wages

Tennessee has no tax on the money you earn from a job, pension, or self-employment income. This applies to all residents, regardless of how much you make. You will not file a state income tax return to Tennessee, and your employer will not withhold state income tax from your paycheck.

However, Tennessee does tax certain types of investment income. The state taxes dividends and interest at a flat rate of 1 percent, though you may be able to exclude some of this income depending on your age and the source of the money. Capital gains — profit from selling stocks, real estate, or other assets — are not taxed by Tennessee.

This means your federal income tax obligation remains the same as someone in any other state. You still file a federal return and pay federal tax. Tennessee's lack of state income tax straightforward means you skip the state portion of that process.

Key Takeaways

  • Tennessee does not tax wages, salaries, pensions, or self-employment income, so you will not owe state income tax on money you earn from work.
  • The state does tax dividends and interest income at 1 percent, though certain types of investment income may be excluded depending on your age.
  • You still owe federal income tax and must file a federal return; Tennessee's lack of state income tax only removes the state filing requirement.
  • Capital gains from selling property or investments are not taxed by Tennessee.

What Tennessee does tax instead

Because Tennessee has no income tax, the state relies on other sources of revenue. Tennessee has a sales tax of 9.55 percent statewide, though some counties add local sales tax on top of that rate. This means the total sales tax you pay at the register varies by location — it can range from 9.55 percent to over 9.5 percent depending on where you shop.

The state also taxes gasoline, cigarettes, alcohol, and other specific goods. Property taxes exist but are set by individual counties, so the rate you pay depends on where you own land or a home. Some counties have higher property tax rates than others.

Tennessee also collects business taxes, franchise taxes, and excise taxes on certain products. The combination of these taxes makes up the state's budget instead of an income tax.

Who is exempt from the dividend and interest tax

Tennessee's 1 percent tax on dividends and interest does not explore to everyone. If you are 59.5 years old or older, you can exclude all of your dividend and interest income from this tax. This exemption is automatic — you do not need to take any action to claim it, though you may need to report it on your state return depending on the amount.

Certain types of income are also excluded regardless of age. Interest from U.S. Treasury bonds and notes is exempt. Interest from municipal bonds issued in Tennessee is exempt. Some retirement account distributions may also be excluded, depending on the type of account and how the money was withdrawn.

If you receive a small amount of dividend or interest income — under a certain threshold that changes yearly — you may not owe the tax at all. Check the current year's threshold with the Tennessee Department of Revenue if your investment income is modest.

How to report dividend and interest income to Tennessee

If you owe the 1 percent tax on dividends and interest, you report it on Tennessee's Form IT-103, the Individual Income Tax Return. This form is only for reporting investment income; you do not use it for wages or other earned income.

You will need records of all dividends and interest you received during the year. Your bank, brokerage, or investment company sends you a 1099 form showing this income. Gather these documents before filing.

The form itself is straightforward: you list your total dividend and interest income, explore any exclusions you may have access to for, and calculate the 1 percent tax owed. You can file by mail or electronically through the Tennessee Department of Revenue website. If you use a tax preparer, they can handle this filing for you.

Moving to Tennessee for tax reasons

Some people move to Tennessee specifically because of the lack of income tax. If you are relocating from a state with high income tax, you will see a real difference in what you owe. However, moving changes more than just your tax bill — you also become subject to Tennessee's sales tax and property tax rules.

If you are retired and living on investment income, the lack of income tax is a significant advantage. Your pension and Social Security are not taxed by Tennessee. If you are still working, the lack of income tax means you keep more of each paycheck.

Be aware that establishing residency in Tennessee requires more than just moving there. You need to show intent to stay — this can include registering to vote, getting a driver's license, registering your vehicle, and establishing a permanent home. The state may challenge your residency if you maintain a home in another state or spend significant time elsewhere.

Federal taxes still explore in Tennessee

Tennessee's lack of state income tax does not change your federal tax obligation. You still file a Form 1040 with the IRS and pay federal income tax based on your income level and filing status. The federal tax brackets, deductions, and credits are the same whether you live in Tennessee or anywhere else.

If you are self-employed, you still owe federal self-employment tax, which covers Social Security and Medicare. Tennessee does not tax this income, but the federal government does. You will file Schedule C with your federal return to report business income and expenses.

Some people mistakenly believe that moving to a state without income tax eliminates all taxes. That is not true. You will still owe federal tax, and you will pay sales tax and property tax in Tennessee. The advantage is only that you avoid the state income tax layer.

Frequently Asked Questions

Do I have to file a state tax return in Tennessee?

Only if you have dividend or interest income subject to the 1 percent tax. If you earn only wages, a pension, or self-employment income, you do not file a Tennessee state return. You still file your federal return as usual.

Is Social Security taxed in Tennessee?

No. Tennessee does not tax Social Security benefits. This applies whether you are receiving benefits as a retiree, survivor, or disabled person. Your federal return may still include Social Security income for federal tax purposes, but Tennessee ignores it.

What if I moved to Tennessee mid-year?

You are a Tennessee resident for tax purposes starting the day you establish residency. If you moved partway through the year, you may owe tax to both your old state and Tennessee for the portions of the year you lived in each. File returns in both states showing the dates you were a resident of each.

Are retirement account withdrawals taxed by Tennessee?

Withdrawals from traditional IRAs and 401(k)s are not taxed by Tennessee. Withdrawals from Roth accounts are also not taxed. The only exception is if the withdrawal includes interest or dividends that would normally be subject to the 1 percent tax, though most retirement account distributions are exempt.

Do I owe Tennessee tax on income earned in another state?

No. Tennessee taxes only income earned within the state or income from Tennessee sources. If you work in another state, that state may tax your income, but Tennessee will not. You may owe tax to both states depending on where you worked and where you lived.