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, which means your paycheck is not reduced by a state income tax withholding the way it would be in most other states.

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%. This applies to income from investments, savings accounts, stock sales, and similar sources. If you have no investment income, you may owe nothing to Tennessee at all.

The absence of state income tax does not mean Tennessee has no taxes. The state funds itself through sales tax, property tax, and other levies. Understanding which income types are taxed and which are not helps you plan your finances and know what forms you need to file.

Key Takeaways

  • Tennessee has no state income tax on wages, salaries, or self-employment income from a job or business.
  • Tennessee taxes investment income—interest, dividends, and capital gains—at 3.85% through the Hall Income Tax.
  • You must file a Tennessee tax return only if you have investment income subject to the Hall Income Tax.
  • Tennessee funds state services through sales tax (currently 9.55% statewide when combined with local rates) and property tax instead of income tax.
  • Federal income tax still applies to all Tennessee residents; state income tax exemption does not affect what you owe to the IRS.

What income is taxed in Tennessee

Tennessee's tax on investment income is called the Hall Income Tax, named after the law that created it. It applies only to certain types of income: interest earned in savings accounts or bonds, dividends from stocks or mutual funds, and capital gains from selling investments at a profit. The rate is a flat 3.85% on all of these combined.

Wages from employment, self-employment income from running a business, retirement distributions from IRAs or 401(k)s, and Social Security benefits are not subject to the Hall Income Tax. If your only income is from a job or a pension, you owe nothing to Tennessee.

The Hall Income Tax applies to Tennessee residents on all investment income, regardless of where the investment is located. It also applies to nonresidents on investment income earned from Tennessee sources.

Who must file a Tennessee tax return

You must file a Tennessee tax return only if you have investment income subject to the Hall Income Tax. The threshold depends on your filing status and age. For most people, you file if your Hall Income Tax liability is more than zero—meaning you had any taxable investment income during the year.

Tennessee does not require you to file a return based on the amount of income you earned from wages. You could earn $100,000 from your job and owe nothing to Tennessee. But if you earned $50 in interest on a savings account, you would need to file to report and pay the Hall Income Tax on that amount.

You file using Form INC 100, Tennessee's individual income tax return. You can file by mail or electronically through the Tennessee Department of Revenue website. The important date is the same as the federal important date: typically April 15 of the year following the tax year.

How the Hall Income Tax works in practice

Suppose you live in Tennessee and earned $60,000 from your job in 2024. You owe no state income tax on that $60,000. But you also received $500 in interest from a savings account and $300 in stock dividends. The Hall Income Tax applies to the $800 combined: 3.85% of $800 equals $30.80.

You would report this on Form INC 100 and pay $30.80 to Tennessee. You would still file your federal return with the IRS and pay federal income tax on all $60,800 of your income. The state tax and federal tax are separate calculations.

Some investment income is exempt from the Hall Income Tax. Municipal bond interest (interest from bonds issued by states, cities, or local governments) is not taxed. Certain retirement account distributions may also be exempt depending on the account type and your age. The Tennessee Department of Revenue publishes a list of exemptions on its website.

Sales tax and property tax in Tennessee

Because Tennessee does not tax income, it relies heavily on sales tax to fund state services. The state sales tax rate is 4.5%, but most counties add a local sales tax on top of that. Combined state and local rates range from 8.5% to 9.75% depending on where you shop. Some counties are higher than others.

Tennessee also taxes real property (land and buildings). Property tax rates vary by county and are set by local assessors. There is no statewide property tax rate. If you own a home or rental property in Tennessee, you pay property tax to your county based on the assessed value of the property.

Sales tax and property tax together make up a much larger share of Tennessee's revenue than the Hall Income Tax does. This is why Tennessee can afford to have no wage income tax—the state has chosen to fund itself through consumption and property taxes instead.

How Tennessee compares to other states

Nine states have no income tax on wages: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming, and New Hampshire. Of these, Tennessee and New Hampshire are the only two that tax investment income. Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming tax neither wages nor investment income.

Most other states tax both wages and investment income. Some states tax investment income at a different rate than wages. For example, some states have a lower capital gains rate than their ordinary income rate. Tennessee's approach—no wage tax but a flat 3.85% on investment income—is unusual.

If you move to Tennessee from a state with income tax, or move away from Tennessee to a state with income tax, your tax situation changes. You may owe tax to your new state on income earned while you lived there. The IRS and state tax agencies coordinate to prevent double taxation, but you must file in both states for the year you moved.

Federal income tax still applies

Tennessee's lack of state income tax does not affect your federal income tax. You must file a federal return with the IRS and pay federal income tax on all your income—wages, investment income, and other sources—regardless of what Tennessee does.

Federal tax rates are progressive, meaning they increase as your income rises. State tax, if it exists, is usually separate from federal tax. You calculate federal tax on your federal return and state tax on your state return. Some states allow you to deduct state taxes paid from your federal taxable income, but this does not change the fact that you owe both.

If your employer withholds federal income tax from your paycheck, that money goes to the IRS, not to Tennessee. Tennessee does not withhold state income tax because it does not tax wages. You may still owe federal tax at the end of the year if your withholding was too low, or you may receive a refund if your withholding was too high.

Frequently Asked Questions

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

No. If your only income is from wages, a job, or self-employment, you owe no Tennessee state income tax and do not need to file a state return. You still file a federal return with the IRS. You file a Tennessee return only if you have investment income (interest, dividends, or capital gains) subject to the Hall Income Tax.

Is Social Security taxed in Tennessee?

No. Social Security benefits are not subject to Tennessee's Hall Income Tax. They are also not subject to state income tax in most other states. Federal income tax may explore to Social Security depending on your total income, but that is a federal matter, not a Tennessee matter.

What if I moved to Tennessee during the year?

You are a Tennessee resident for tax purposes based on where you lived on December 31 of the tax year. If you moved to Tennessee partway through the year, you file as a Tennessee resident for the full year if you lived there on December 31. If you moved away from Tennessee, you file as a nonresident. You may also need to file a return in your previous state for the months you lived there.

Are retirement account withdrawals taxed in Tennessee?

Withdrawals from traditional IRAs and 401(k)s are not subject to Tennessee's Hall Income Tax. Withdrawals from Roth accounts are also not taxed. However, these withdrawals are subject to federal income tax. Some retirement income may be exempt from federal tax depending on your age and account type, but Tennessee does not add its own tax on top.

How do I file Form INC 100?

You can file Form INC 100 by mail or electronically through the Tennessee Department of Revenue website. The paper form is available on the department's website. Electronic filing is faster and reduces the chance of errors. The important date is April 15 unless you request an extension from the IRS, which also extends your Tennessee important date.