Tennessee does not have a 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. Tennessee is one of nine states with no income tax on wages. This is a significant difference from most other states, where residents pay between 3 and 13 percent of their earnings to the state.
However, Tennessee does tax certain types of income that are not wages. The state taxes interest and dividend income at 6 percent, though there are some exemptions depending on when you earned the income and how old you are. Tennessee also collects sales tax, property tax, and excise taxes on items like gasoline and cigarettes.
If you moved to Tennessee from a state with income tax, or if you work across state lines, understanding which income is taxed and which is not will affect how much you owe.
Key Takeaways
- Tennessee has no state income tax on wages, salaries, or self-employment income from a job or business.
- Tennessee does tax interest and dividend income at 6 percent, though some income earned before 2022 and income for people over 59½ may be exempt.
- You still file a federal tax return if you owe federal income tax, but you do not file a separate Tennessee state income tax return.
- Tennessee makes up lost income tax revenue through sales tax (which varies by county but is at least 9.55 percent) and property taxes.
- If you work in Tennessee but live in another state, you may owe income tax to your home state, not to Tennessee.
What types of income Tennessee does not tax
Wages and salaries from employment are completely free from Tennessee state income tax. This includes tips, bonuses, and overtime pay. If you are self-employed or own a business, your business income is also not taxed by Tennessee.
Retirement income from pensions and 401(k) withdrawals is not taxed by the state. Social Security benefits are not taxed by Tennessee either. This makes Tennessee attractive to retirees, since they can receive pension and Social Security income without paying state income tax on it.
Capital gains — the profit you make when you sell an investment or property — are not taxed by Tennessee as income. However, if the gain comes from interest or dividends on that investment, those may be taxed under the rules described below.
Interest and dividend income: the one income Tennessee does tax
Tennessee taxes interest income and dividend income at a flat rate of 6 percent. This applies to money you earn from savings accounts, bonds, stock dividends, and similar investments. If you have a savings account earning interest or you own stocks that pay dividends, Tennessee considers that taxable income.
There are exemptions. If you earned the interest or dividends before January 1, 2022, you do not owe Tennessee tax on that income. Additionally, if you are 59½ years old or older, you are exempt from the tax on interest and dividends, regardless of when you earned it. This exemption is one reason Tennessee is popular with older residents.
You report this income on a separate Tennessee form when you file your federal return. The state does not require a separate tax return, but you do need to report the income if it exceeds a certain threshold (which changes yearly and is set by the state).
How Tennessee replaces the revenue from no income tax
States without income tax must raise money another way. Tennessee relies heavily on sales tax, which is added to most purchases you make in stores. The state sales tax is 4.55 percent, but counties add their own local sales tax on top of that. Depending on where you live in Tennessee, your total sales tax ranges from 9.55 percent to over 9.7 percent.
Property tax in Tennessee is also significant. The state does not have a statewide property tax, but counties and cities set their own rates. Property taxes vary widely by location — some counties charge less than 0.5 percent of home value per year, while others charge closer to 1 percent or more.
Tennessee also collects excise taxes on gasoline, cigarettes, alcohol, and other goods. These taxes are built into the price you pay at the pump or store, so you may not see them as a separate line item.
What you file if you live or work in Tennessee
If you owe federal income tax, you file a federal return with the IRS as usual. Tennessee does not require you to file a separate state income tax return because there is no state income tax on wages.
If you have interest or dividend income above the reporting threshold, you will report it on a Tennessee form that accompanies your federal return. The exact form and threshold change yearly, so check the Tennessee Department of Revenue website for the current year's rules.
If you are self-employed, you still file Schedule C with your federal return to report business income and pay federal self-employment tax. Tennessee does not add a separate self-employment tax.
If you work in Tennessee but live in another state
Your home state, not Tennessee, has the right to tax your wages. If you live in Kentucky, Virginia, Georgia, or another neighboring state and commute to work in Tennessee, you owe income tax to your home state on that income. Tennessee does not tax non-residents on wages earned within the state.
You may be able to claim a credit on your home state's return for taxes paid to that state, which reduces what you owe overall. The rules vary by state, so check your home state's tax agency website or speak with a tax professional about how to handle multi-state income.
If you are a Tennessee resident and work in another state, that other state may tax your wages. You would then claim a credit on your Tennessee return (if applicable) or on your federal return to avoid paying tax twice on the same income.
Frequently Asked Questions
Do I have to file a Tennessee tax return?
No, not for income tax. Tennessee has no state income tax on wages, so there is no state income tax return to file. If you have interest or dividend income above the state's threshold, you report it on a form that goes with your federal return, but this is not a separate tax return filing.
Will I owe Tennessee tax on my 401(k) or pension?
No. Withdrawals from 401(k)s, IRAs, pensions, and similar retirement accounts are not taxed by Tennessee. This applies whether you are retired or still working. Social Security benefits are also not taxed by the state.
What if I inherited money or received a gift?
Tennessee does not have an inheritance tax or gift tax. Money you inherit or receive as a gift is not taxed by the state. You may owe federal estate tax if the estate is very large, but that is a federal issue, not a Tennessee one.
Are rental properties taxed differently in Tennessee?
Rental income from property you own in Tennessee is not taxed as income by the state. However, you still owe federal income tax on rental income. You also pay property tax on the rental property itself, based on its assessed value.
If I move to Tennessee, do I owe back taxes to my old state?
No. Once you establish residency in Tennessee, you owe income tax only to Tennessee (which is none on wages) and to the federal government. Your old state has no claim on income you earn after you move, as long as you properly establish Tennessee residency and do not maintain a home or significant ties in the old state.