Tennessee does not have a state income tax on wages or salaries

You do not pay Tennessee state income tax on money you earn from a job, self-employment, or most other sources. Tennessee is one of nine states with no income tax on wages. This means your paycheck is not reduced by a state income tax withholding, and you do not file a state income tax return for wages.

However, Tennessee does tax certain types of income that other states do not. If you receive interest or dividends, you may owe Tennessee tax on that money. Understanding which income is taxed and which is not matters when you plan your finances or file federal taxes.

Key Takeaways

  • Tennessee has no tax on wages, salaries, or self-employment income from a business or trade.
  • Tennessee taxes interest income and dividend income at a flat rate of 3.85 percent, though some income is exempt.
  • You do not file a Tennessee state income tax return if your only income is wages, even if you have interest or dividends below the filing threshold.
  • Federal income tax still applies to all income, and you file a federal return as usual regardless of Tennessee's state tax rules.
  • If you move to or from Tennessee, your tax situation may change depending on when you moved and what type of income you received.

What income Tennessee does tax

Tennessee taxes interest income and dividend income at a flat rate of 3.85 percent. Interest includes money earned from savings accounts, bonds, certificates of deposit, and loans you made to others. Dividends are payments from stocks or mutual funds you own.

Not all interest and dividend income is taxed. Tennessee exempts certain types: interest from U.S. Treasury bonds, interest from municipal bonds issued in Tennessee, and dividends from stocks you own if the company is incorporated in Tennessee. If you receive Social Security benefits, those are not subject to Tennessee tax.

If your total interest and dividend income for the year is less than $100, you do not file a Tennessee return. If it is $100 or more, you must file Form INC 100, the Tennessee Individual Income Tax Return, even if you owe no tax.

How to report interest and dividend income to Tennessee

You report Tennessee taxable interest and dividends on Form INC 100. You will receive a 1099-INT form from your bank or financial institution for interest income, and a 1099-DIV form for dividend income. These forms arrive by January 31 and show exactly how much you earned.

When you file your federal return with the IRS, you report the same interest and dividend income on your federal forms (Schedule B if you have more than $1,500 in interest or dividends). Tennessee uses the same income figures, so you are not calculating different amounts for state and federal purposes.

The Tennessee Department of Revenue accepts returns by mail or through approved tax software. The filing important date is the same as the federal important date: April 15 of the year following the tax year, unless you request an extension.

What happens if you move to or from Tennessee

If you move into Tennessee during the year, you are a part-year resident. You owe Tennessee tax only on income you earned while living in Tennessee. If you moved out of Tennessee, you owe tax only on income earned before you left.

You file Form INC 100-CR, the part-year resident return, to report your income and the dates you lived in Tennessee. You will need to know the exact date you moved. Your employer's records or a lease or deed showing your move date will help establish when your residency changed.

If you worked in Tennessee but lived in another state, you may owe Tennessee tax on wages earned in the state, depending on Tennessee's reciprocal agreements with other states. Check with the Tennessee Department of Revenue if you worked across state lines.

Federal income tax still applies in Tennessee

Tennessee's lack of state income tax does not affect your federal taxes. You still file a federal return with the IRS and pay federal income tax on all your income: wages, self-employment, interest, dividends, and other sources. The federal tax rate depends on your income level and filing status, not on where you live.

When you file your federal return, you report the same income you would report to Tennessee (if you had to file a Tennessee return). Federal tax withholding from your paycheck is separate from state tax withholding. Since Tennessee has no state tax, you will not see a state withholding line on your pay stub.

Self-employment income and Tennessee tax

If you are self-employed or own a business, you do not pay Tennessee state income tax on your business income. You do pay federal self-employment tax (Social Security and Medicare tax) and federal income tax on your net business profit.

You file Schedule C with your federal return to report business income and expenses. You calculate your net profit on that form, and that profit is subject to federal tax. Tennessee does not tax this income, so you do not file a separate Tennessee business return for income tax purposes.

If your business generates interest or dividend income (for example, if you hold investments as part of your business), that interest and dividend income is subject to Tennessee's 3.85 percent tax if it meets the filing threshold of $100 or more.

Frequently Asked Questions

Do I have to file a Tennessee return if I only have wage income?

No. If your only income is wages or salary, you do not file a Tennessee state return. Tennessee has no tax on wages. You still file your federal return with the IRS as usual.

What if I have both wages and interest income?

You do not file a Tennessee return unless your interest and dividend income totals $100 or more for the year. If it does, you file Form INC 100 and report the interest and dividends. Your wages are not reported on the Tennessee return.

Does Tennessee tax retirement income or pensions?

No. Tennessee does not tax income from pensions, 401(k) withdrawals, IRA distributions, or other retirement account withdrawals. You pay federal tax on these amounts, but not Tennessee tax.

What if I moved to Tennessee partway through the year?

You file Form INC 100-CR and report only the income you earned while living in Tennessee. You will need the date you moved. Interest and dividend income is reported only if it totals $100 or more and was earned while you were a Tennessee resident.

Do I need to adjust my federal withholding because Tennessee has no income tax?

You may want to review your federal withholding with your employer. Since you are not paying state tax, you might adjust your federal withholding to match your actual tax liability. Use the IRS withholding calculator on irs.gov to estimate what you should have withheld.