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 you owe both federal income tax and state income tax on your earnings.

However, Tennessee does tax certain types of income that are not wages. The state taxes interest, dividends, and capital gains at a flat rate of 3.85 percent. This applies to income from investments, savings accounts, and the sale of stocks or property — not to your paycheck from an employer.

The lack of wage tax does not mean Tennessee has no taxes at all. The state collects revenue through sales tax, property tax, and other fees. Understanding which income is taxed and which is not helps you plan your finances and file your federal return correctly.

Key Takeaways

  • Tennessee does not tax wages or salaries, so you owe no state income tax on money from a job.
  • The state does tax investment income — interest, dividends, and capital gains — at 3.85 percent.
  • You still owe federal income tax on all your earnings, even though Tennessee has no state income tax.
  • Tennessee funds state services through sales tax (currently 9.55 percent statewide), property tax, and other revenue sources.

What types of income Tennessee does tax

Tennessee's 3.85 percent tax applies to investment income only. This includes interest earned in a savings account or money market account, dividends from stocks or mutual funds, and capital gains from selling an investment property or securities at a profit. If you receive a 1099-INT, 1099-DIV, or report a capital gain on your federal return, you may owe Tennessee tax on that income.

The tax does not explore to retirement account withdrawals from a traditional IRA or 401(k), because those withdrawals are considered a return of your own contributions and earnings, not new investment income. However, if money in a retirement account earns interest or dividends while it sits in the account, that growth is not taxed by Tennessee either — the tax only applies to investment income earned outside a retirement account.

Social Security benefits are not taxed by Tennessee. Pension income is also exempt from state tax. This means retirees who live on Social Security, pensions, or retirement account withdrawals typically owe no Tennessee state income tax, even if they have substantial income.

How Tennessee's sales tax works instead

Because Tennessee does not tax wages, the state relies heavily on sales tax to fund schools, roads, and other services. The statewide sales tax rate is 9.55 percent as of 2024, though the exact rate varies slightly by county and city — some local jurisdictions add their own sales tax on top of the state rate.

Sales tax applies to most goods you buy in stores, restaurants, and online retailers that have a physical presence in Tennessee. Groceries are taxed at a lower rate (4 percent) than other items. Services like haircuts, repairs, and professional fees are generally not subject to sales tax, though this varies by the type of service.

Sales tax is collected by the merchant at the point of sale and sent to the state. Unlike income tax, which is withheld from your paycheck throughout the year, sales tax comes directly out of your pocket when you make a purchase. Over time, this can add up significantly, especially for families with lower incomes who spend a larger share of their earnings on taxable goods.

Property tax in Tennessee

Tennessee also taxes real property — land and buildings — through a property tax system run by county assessors. The property tax rate varies by county and is calculated based on the assessed value of your home or other real estate you own. There is no statewide property tax rate; each county sets its own rate within state limits.

Property tax bills are sent annually or semi-annually, depending on your county. The amount you owe is based on the assessed value of your property, which the county assessor determines. If you believe your property has been assessed too high, you can file a formal appeal with your county assessor's office.

Homeowners may be may be able to access for homestead exemptions or other property tax relief programs, depending on age, disability status, or military service. These programs reduce the assessed value of your home and lower your tax bill. Contact your county assessor's office to learn whether you may have access to for any exemptions in your area.

Federal income tax still applies in Tennessee

The absence of Tennessee state income tax does not change your federal income tax obligation. You still owe federal income tax on all your wages, investment income, and other taxable income, just as residents of every other state do. Your employer withholds federal tax from your paycheck, and you file a federal return with the IRS each year.

When you file your federal return, you report your income and claim deductions or the standard deduction, just like anyone else. Tennessee residents do not get any special federal tax breaks because the state has no income tax. The federal tax system is separate from state systems, and each operates independently.

If you work for an employer in another state but live in Tennessee, you may owe income tax to that other state, depending on its rules. Some states tax residents who work out of state, and some tax nonresidents who work within the state. If this applies to you, consult a tax professional or contact the other state's revenue department for guidance.

How to file taxes as a Tennessee resident

Because Tennessee has no state income tax, you do not file a state income tax return. You file only your federal return with the IRS. This simplifies your tax filing — you have one return to complete instead of two.

If you have investment income subject to Tennessee's 3.85 percent tax, you report that income on your federal return as usual. Tennessee does not require a separate state return for this tax; instead, the state collects it through a different mechanism or you may owe it when you file your federal return, depending on how the income is reported. For clarity on whether you owe Tennessee tax on specific investment income, contact the Tennessee Department of Revenue or consult a tax professional.

You will still receive W-2 forms from your employer and 1099 forms for investment income, just as residents of other states do. These forms report your income to the IRS and to you. Keep copies for your records and use them to complete your federal return.

Other Tennessee taxes and fees

Beyond income, sales, and property tax, Tennessee collects revenue through other sources. The state has a franchise tax on certain businesses, a gas tax on fuel purchases, and various licensing and registration fees. These do not directly affect most wage earners, but they contribute to the state's overall tax structure.

If you own a vehicle registered in Tennessee, you pay a registration fee each year. If you own a business, you may owe franchise tax or other business-related taxes. If you purchase gasoline, a portion of the pump price goes to state and federal fuel taxes. These are smaller revenue sources compared to sales and property tax, but they are part of how Tennessee funds state operations.

Frequently Asked Questions

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

No. Tennessee has no state income tax, so you do not file a state income tax return. You file only your federal return with the IRS. If you have investment income, you report it on your federal return as usual.

What is the sales tax rate in Tennessee?

The statewide sales tax is 9.55 percent as of 2024, but the exact rate varies by county and city because local jurisdictions can add their own sales tax. Check your county's rate for the precise amount you will pay on purchases in your area.

Are retirement accounts taxed in Tennessee?

No. Withdrawals from traditional IRAs, 401(k)s, and other retirement accounts are not taxed by Tennessee. Social Security and pension income are also exempt. Only investment income earned outside a retirement account is subject to Tennessee's 3.85 percent tax.

If I work in another state but live in Tennessee, do I owe that state's income tax?

It depends on the other state's rules. Some states tax residents who work out of state, and some tax nonresidents who work within the state. Contact the other state's revenue department or speak with a tax professional to determine your obligation.

How do I pay Tennessee's investment income tax?

Tennessee's 3.85 percent tax on investment income is reported and paid through your federal return or a separate state form, depending on the type of income. Contact the Tennessee Department of Revenue for specific guidance on your situation, or consult a tax professional.