Tennessee has no state income tax on wages, interest, or dividends

Tennessee does not tax wages, salaries, or most investment income. If you work in Tennessee or live there, you will not owe state income tax on your paycheck. This is one of nine states with no broad income tax, which can make a real difference in your take-home pay and retirement planning.

However, Tennessee does tax one specific type of investment income: interest and dividends from stocks and bonds. This tax applies only to income earned before January 1, 2022, and only if you were already receiving that income before that date. New interest and dividend income earned after 2021 is not taxed. This phase-out means fewer and fewer Tennesseans will owe this tax each year.

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 levies. But for most people living or working in Tennessee, the absence of income tax on wages is the most visible tax benefit.

Key Takeaways

  • Tennessee does not tax wages, salaries, or self-employment income from any source.
  • Interest and dividend income is taxed only if you received it before January 1, 2022, and the tax is being phased out completely.
  • Tennessee makes up its state revenue through sales tax (currently 9.55% statewide when combined with local rates) and property tax.
  • If you move to Tennessee from a state with income tax, you will not owe Tennessee income tax on wages earned after you arrive.
  • Retirees drawing Social Security, pensions, or 401(k) withdrawals owe no Tennessee state income tax on those payments.

How the interest and dividend tax works (and why it is disappearing)

Tennessee's tax on interest and dividends applies only to income earned before January 1, 2022. If you were receiving interest or dividend payments before that date, you may still owe tax on that income. The tax rate is 2% on interest and 4% on dividends.

Starting in 2022, Tennessee stopped taxing new interest and dividend income. The state is also phasing out the tax on income earned before 2022. This means the number of people owing this tax shrinks each year. If you are just starting to invest or if you recently moved to Tennessee, you will not owe this tax on new income.

To know whether you owe this tax, check the date you first received the interest or dividend payment. If it was before January 1, 2022, you may owe tax. If it was after that date, you do not. The Tennessee Department of Revenue can clarify your situation if you are unsure.

What this means for your federal tax return

Tennessee's lack of income tax does not change your federal tax return. You still report all income to the IRS and pay federal income tax as usual. Tennessee straightforward does not take a state share of that income.

This can matter for tax planning. If you are deciding whether to take a large distribution from a retirement account, sell an investment, or realize other income, you will owe federal tax but not Tennessee state tax. That can make the decision slightly less costly than it would be in a state with income tax.

If you moved to Tennessee from another state and still have income from that state (rental property, a business, or a job), you may owe tax to your former state on that income. Tennessee will not tax it, but your old state might. Check with a tax professional if you have income from multiple states.

How Tennessee taxes affect your retirement planning

The absence of income tax on wages makes Tennessee attractive for retirees. Social Security benefits, pension payments, and 401(k) or IRA withdrawals are not taxed by Tennessee. This means your retirement income goes further than it would in a state with income tax.

If you are planning to retire and considering where to live, Tennessee's tax treatment of retirement income is worth factoring in. A retiree drawing $50,000 per year from a pension and Social Security will owe no Tennessee state income tax on that amount. In a state with a 5% income tax, that same retiree would owe $2,500 per year.

This does not mean Tennessee is tax-free overall. You will still pay property tax on a home and sales tax on purchases. But for people living primarily on retirement income, the lack of income tax is a meaningful advantage.

Sales tax and property tax: where Tennessee collects revenue

Tennessee makes up for the lack of income tax through sales tax and property tax. The state sales tax rate is 9.55% when you combine the state rate with the average local rate. This is higher than the national average and means everyday purchases cost more in Tennessee than in some other states.

Property tax varies by county but averages around 0.7% of home value statewide. This is lower than the national average, but it still represents a significant cost for homeowners. If you are moving to Tennessee, factor in both the sales tax on regular purchases and the property tax on a home.

Some items are exempt from Tennessee sales tax, including groceries and prescription medications. But clothing, gasoline, and most other goods are taxed at the full rate. Over time, a higher sales tax can offset some of the savings from not paying income tax, depending on your spending habits.

Moving to Tennessee: what changes on your taxes

If you move to Tennessee from a state with income tax, you will not owe Tennessee income tax on wages earned after you arrive. You may still owe tax to your former state on income earned while you lived there, depending on that state's rules.

Some states tax residents on all income, even after they move away, until they formally establish residency elsewhere. Others tax only income earned within the state. When you move, notify your former state's tax authority of your new address and provide proof of Tennessee residency (such as a lease or deed). This helps prevent double taxation.

If you move mid-year, you may file a part-year resident return in your old state and a part-year resident return in Tennessee. Your former state taxes only income earned before you left; Tennessee taxes only income earned after you arrived. A tax professional can help you file correctly if you moved partway through the year.

Special situations: remote work, military, and business income

If you work remotely for a company in another state but live in Tennessee, you owe no Tennessee income tax on your wages. Tennessee taxes only income earned within the state or by Tennessee residents on out-of-state income in limited cases. Remote work income is taxed by the state where you live, not where your employer is located.

Military members stationed in Tennessee may have different rules depending on their home state and the type of income. Some states do not tax military pay for residents stationed elsewhere. If you are military, check with your state's tax authority or a military tax specialist to understand your obligations.

If you own a business in Tennessee, you do not pay Tennessee income tax on business profits. However, you will owe federal self-employment tax and federal income tax. Some business structures (such as S-corporations or partnerships) may have different tax treatment, so consult a tax professional if you are self-employed.

Frequently Asked Questions

Do I have to file a Tennessee state tax return?

No. Since Tennessee has no income tax on wages, most people do not file a state return. However, if you received interest or dividend income before January 1, 2022, you may need to file to report that income. Contact the Tennessee Department of Revenue if you are unsure whether you have a filing requirement.

If I move out of Tennessee, do I owe back taxes?

No. Tennessee does not tax wages, so there are no back taxes to owe when you leave. If you lived in Tennessee and earned wages there, you paid no state income tax while you were there and owe none after you leave. Your new state will tax income earned after you arrive.

Does Tennessee tax retirement account withdrawals like 401(k)s and IRAs?

No. Withdrawals from 401(k)s, IRAs, and other retirement accounts are not taxed by Tennessee. You will owe federal income tax on most withdrawals, but Tennessee takes no share. This applies to both traditional and Roth accounts.

What if I have rental property in Tennessee but live in another state?

Tennessee does not tax the rental income. However, your home state may tax it, depending on that state's rules. Some states tax residents on all income regardless of where it is earned. Check with your home state's tax authority to see whether you owe tax on out-of-state rental income.

Is Tennessee's lack of income tax permanent?

Tennessee has had no income tax on wages since 1947. The state has no current plans to introduce one. However, tax laws can change, so it is worth staying informed about Tennessee tax policy if you are making long-term financial plans based on the current system.