Tennessee does not have a state income tax on wages, salaries, or most other forms of personal income

Tennessee is one of nine states with no tax on earned income. You will not file a Tennessee state income tax return for wages from a job, self-employment income, or most other sources. This is a permanent feature of Tennessee tax law, not a temporary exemption.

However, Tennessee does tax certain specific types of income that other states might not. The state taxes interest and dividend income at a flat rate, though this tax is being phased out. Tennessee also has a sales tax, property tax, and excise taxes on items like gasoline and cigarettes. Understanding which income types are taxed and which are not helps you plan what you owe to the state versus what you owe to the federal government.

Key Takeaways

  • Tennessee collects no tax on wages, salaries, self-employment income, or capital gains from the sale of stocks or real estate.
  • Interest and dividend income is taxed by Tennessee at a flat rate, though this tax phases out completely by 2026.
  • You still file federal income tax returns as a Tennessee resident; the state straightforward does not collect income tax alongside it.
  • Tennessee relies on sales tax, property tax, and excise taxes instead, so your total state tax burden depends on what you spend and own, not just what you earn.

What income Tennessee does not tax

Wages and salaries are completely exempt from Tennessee state tax. If you work for an employer and receive a W-2, Tennessee takes no portion of that income. Self-employment income is also not taxed by the state, so if you run a business or work as a contractor, you owe Tennessee nothing on that earnings.

Capital gains — the profit you make when you sell stocks, bonds, mutual funds, or real estate — are not taxed by Tennessee. This applies whether you held the asset for one year or twenty years. Long-term and short-term capital gains receive the same treatment: no state tax.

Retirement income is generally not taxed either. Distributions from 401(k) plans, IRAs, pensions, and Social Security benefits are all exempt from Tennessee state tax. This makes Tennessee attractive to retirees, since they can withdraw retirement savings without the state taking a cut.

Interest and dividend income: the exception being phased out

Tennessee taxes interest income and dividend income differently from wages. Until recently, the state applied a flat tax rate to these types of investment income. As of 2023, Tennessee began phasing out this tax, reducing the rate each year until it reaches zero.

The phase-out schedule means the tax rate drops annually. By 2026, interest and dividend income will be completely exempt, matching the treatment of wages and capital gains. If you receive interest from savings accounts or bonds, or dividends from stocks or mutual funds, check the current year's rate to see what portion, if any, Tennessee collects. The Tennessee Department of Revenue publishes the current rate each tax year.

This income is reported on your federal return regardless of the state tax status. You will still receive a 1099-INT for interest or 1099-DIV for dividends from your bank or investment firm. Tennessee's phase-out straightforward means the state's portion of what you owe shrinks each year until it disappears.

How Tennessee replaces income tax revenue

States that do not tax income must fund schools, roads, and services through other means. Tennessee relies heavily on sales tax, which applies to most goods you purchase. The state sales tax rate is 7 percent, though some counties add local sales tax on top, bringing the total to 8 or 9 percent depending on where you live.

Property tax is the second major revenue source. Tennessee taxes real estate based on assessed value. The rate varies by county, ranging from roughly 0.4 percent to 1.6 percent of property value annually. If you own a home or rental property in Tennessee, you will receive a property tax bill from your county assessor.

Excise taxes on gasoline, cigarettes, alcohol, and other goods also fund the state. These are smaller per-transaction but add up across millions of purchases. The combination of sales tax, property tax, and excise taxes means Tennessee residents pay state tax through spending and ownership rather than through income.

Federal income tax still applies in Tennessee

Having no state income tax does not mean you avoid federal income tax. You file a federal return with the IRS just as residents of every other state do. Your federal tax liability depends on your income level, filing status, and deductions — the same calculation applies whether you live in Tennessee or New York.

The difference is that you will not also file a Tennessee state return. You will not owe state income tax on top of federal tax. Your federal return stands alone as your only income tax filing with a government tax authority.

Self-employed individuals still pay federal self-employment tax (Social Security and Medicare), which funds those federal programs. Tennessee does not collect a separate self-employment tax, but the federal obligation remains the same as it would in any other state.

How to report income if you move to or from Tennessee

If you move to Tennessee during a tax year, you report income to both states for the portion of the year you lived in each. You file a part-year resident return in the state you left, reporting only the income earned while you lived there. Tennessee has no income tax, so you would not file a Tennessee return for that year — only a federal return and a return for your previous state.

If you move away from Tennessee to a state with income tax, you file a part-year return in Tennessee (reporting nothing, since there is no tax) and a part-year return in your new state for the income earned after you moved. The IRS coordinates these filings so you do not pay federal tax twice on the same income.

Moving dates matter for sales tax and property tax purposes as well. If you buy a car in Tennessee and move to another state, you may owe sales tax in your new state depending on its rules. Keep documentation of your move date and where you lived each month to support your tax filings.

Frequently Asked Questions

Do I still have to file a federal tax return if I live in Tennessee?

Yes. Tennessee's lack of state income tax does not affect your federal filing requirement. You file a federal return with the IRS based on your income level and filing status, just as you would in any other state. The only difference is you do not also file a Tennessee state return.

What if I work in Tennessee but live in another state?

You owe income tax to the state where you live, not the state where you work. If you live in Kentucky and work in Tennessee, you file a Kentucky return on your Tennessee wages. Tennessee has no income tax to collect, so it does not matter where your income comes from. Your home state taxes your total income.

Are retirement withdrawals really not taxed by Tennessee?

Correct. Withdrawals from 401(k)s, IRAs, pensions, and Social Security are all exempt from Tennessee state tax. You still owe federal income tax on most retirement distributions, but Tennessee takes nothing. This is one reason Tennessee attracts retirees.

If I sell my house in Tennessee, do I owe state tax on the profit?

No. Capital gains from selling real estate or any other asset are not taxed by Tennessee. You may owe federal capital gains tax depending on your income and how long you owned the property, but Tennessee collects nothing on the sale.

How much sales tax will I pay instead of income tax?

Sales tax varies by county but is typically 7 to 9 percent on most purchases. Your total state tax burden depends on how much you spend and own, not your income. Someone earning $30,000 and someone earning $300,000 pay the same sales tax rate, but the higher earner likely spends more overall.