Tennessee has no state income tax on wages, but does tax investment income

Tennessee does not tax the wages you earn from a job. You will not pay state income tax on salary, hourly pay, or most forms of employment income. However, Tennessee does tax certain types of investment income — specifically dividends and interest — through what the state calls the Hall Income Tax. This tax applies only to investment earnings, not to money you make from working.

Because Tennessee has no wage tax, you will not file a state income tax return based on your paycheck. If you have no investment income, you have no state income tax obligation in Tennessee. This is one reason Tennessee is sometimes called a tax-friendly state for workers, though the state makes up revenue through sales tax and other levies.

Key Takeaways

  • Tennessee does not tax wages, salaries, or most employment income, so you will not owe state income tax on your paycheck.
  • The state does tax dividends and interest income through the Hall Income Tax, which applies to investment earnings above a certain threshold.
  • You only file a Tennessee state tax return if you have investment income subject to the Hall Income Tax.
  • Tennessee makes up lost wage-tax revenue through sales tax, which is applied to most purchases at the point of sale.

What the Hall Income Tax covers

The Hall Income Tax is Tennessee's only state income tax, and it applies to dividends and interest. Dividends are payments made to you by companies whose stock you own. Interest includes earnings from savings accounts, bonds, certificates of deposit (CDs), and money market accounts. If you receive these types of income, you may owe Tennessee state tax on them.

The Hall Income Tax does not explore to capital gains — the profit you make when you sell a stock or investment property for more than you paid for it. It also does not explore to retirement account withdrawals, Social Security benefits, or pension income. The tax rate on dividends and interest is a flat 5 percent, and it applies only to income above a certain threshold, which changes yearly. For the 2024 tax year, the threshold is $1,250 for single filers and $2,500 for married couples filing jointly.

This means if your total dividends and interest for the year are below the threshold, you owe no Hall Income Tax. If they exceed it, you pay 5 percent on the amount above the threshold, not on the entire sum.

Who files a Tennessee state tax return

You must file a Tennessee state tax return only if your dividends and interest income exceeds the annual threshold. If you have no investment income, or if your investment income falls below the threshold, you do not file a state return. This is different from federal taxes, where you may need to file even if you owe nothing, depending on your income level.

If you do file, you will use Tennessee Form INC, which is the state's income tax return form. You will report your dividends and interest, subtract the threshold amount, and calculate 5 percent of the remainder. The form is available on the Tennessee Department of Revenue website. You can file by mail or electronically through the state's online system.

How Tennessee makes up the lost wage tax revenue

Because Tennessee does not tax wages, the state relies heavily on sales tax to fund schools, roads, and public services. Tennessee's state sales tax rate is 7 percent, and many counties add a local sales tax on top of that, bringing the total to 8 or 9 percent depending on where you live. This means you pay sales tax on most items you buy in stores or online.

Tennessee also collects revenue through property taxes (though these are lower than in many states), gasoline taxes, and business taxes. The combination of no income tax and higher sales tax means your tax burden depends on how much you spend rather than how much you earn. Retirees and people on fixed incomes often benefit from the lack of wage tax, while high-spending households may pay more in sales tax.

How to report investment income on your federal return

Even though Tennessee does not tax most investment income, you must still report dividends and interest on your federal income tax return. The IRS requires you to report all investment earnings regardless of state tax rules. You will receive a 1099-INT form from banks and financial institutions that paid you interest, and a 1099-DIV form from companies or funds that paid you dividends.

Report these amounts on your federal return using Schedule B (Interest and Ordinary Dividends) if your income exceeds certain thresholds, or on the main 1040 form if it does not. Your federal tax rate on investment income may be different from Tennessee's 5 percent rate, depending on your total income and filing status. Filing your federal return correctly ensures you have the documentation you need if Tennessee ever requests proof of your investment income.

What happens if you move to or from Tennessee

If you move to Tennessee from another state, you will no longer owe that state's income tax on wages earned after you move, assuming you establish Tennessee residency. Residency is typically based on where you live for more than half the year and where you intend to make your home. You may owe tax to your previous state for wages earned while you lived there, and you will file a part-year return in both states for the year you moved.

If you move away from Tennessee, you will no longer owe Tennessee's Hall Income Tax on new investment income earned after you leave. However, you may owe income tax to your new state on all income, including wages. Some states have no income tax (like Florida and Texas), while others tax wages at rates ranging from 3 to 13 percent. Check your new state's tax rules before you move to understand your full tax picture.

Frequently Asked Questions

Do I have to pay Tennessee income tax on my paycheck?

No. Tennessee does not tax wages or salary income. You will not owe state income tax based on money you earn from a job, regardless of how much you make.

What if I have both wages and investment income?

You pay no state tax on the wages. If your investment income (dividends and interest) exceeds the annual threshold, you owe 5 percent on the amount above that threshold. The two types of income are taxed separately under Tennessee law.

Do I need to file a Tennessee tax return if I have no investment income?

No. You only file a Tennessee state return if you have dividends or interest income above the threshold. If you have no investment income or it falls below the threshold, you have no state filing requirement.

Is Tennessee sales tax the same everywhere in the state?

No. The state sales tax is 7 percent, but counties can add local sales tax. Your total sales tax rate depends on which county you live or shop in and ranges from 7 to 9.55 percent across Tennessee.

What counts as investment income for Tennessee tax purposes?

Dividends from stocks and interest from savings accounts, bonds, and CDs count. Capital gains from selling investments do not. Retirement account withdrawals, pensions, and Social Security also do not count as taxable investment income in Tennessee.