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

If you earn a paycheck in Tennessee, the state does not tax that income. Tennessee is one of nine states with no income tax on wages, which means you will not see a state income tax withholding on your pay stub. This applies whether you work for an employer, are self-employed, or receive income from a job.

However, Tennessee does tax certain types of income that other states do not. The state taxes dividends and interest income at a flat rate of 3.75%, though this rate is being phased out and will reach zero by 2026. Tennessee also taxes capital gains at 3.75%, with the same phase-out schedule. If you have no investment income, you may owe nothing to Tennessee at all.

The lack of wage tax does not mean Tennessee has no taxes. The state funds itself through sales tax, property tax, and excise taxes on items like gasoline and alcohol. Your total tax burden depends on where you spend money and what you own, not just where you work.

Key Takeaways

  • Tennessee does not tax wages, salaries, or self-employment income from work.
  • Tennessee taxes dividends and interest at 3.75% through 2025, then the rate drops to zero by 2026.
  • Capital gains are taxed at 3.75% on the same phase-out schedule as investment income.
  • Tennessee's sales tax rate is 9.55% statewide, though some counties add local sales tax on top.
  • If you moved to Tennessee from a state with income tax, you do not owe back taxes to Tennessee on income earned before you arrived.

How the phase-out of investment income tax works

Tennessee's tax on dividends and interest is scheduled to disappear over time. For 2024 and 2025, the rate remains 3.75%. Starting in 2026, the rate will drop to zero, meaning no state tax on this income going forward. This phase-out is already written into law, so unless the legislature changes it, investment income will be completely untaxed by the state.

The same timeline applies to capital gains. If you sell stock, real estate, or other assets at a profit, Tennessee taxes that gain at 3.75% through 2025. From 2026 onward, capital gains will not be taxed by the state. This makes Tennessee increasingly attractive for retirees and investors who live on investment income rather than wages.

If you have significant dividends, interest, or capital gains in 2024 or 2025, you will need to report this income on your Tennessee tax return. The state uses Form IT-40 for residents. However, if your only income is wages, you have no state filing requirement and no tax owed.

What income Tennessee does not tax

Beyond wages and salaries, Tennessee does not tax Social Security benefits, retirement account withdrawals from traditional IRAs or 401(k)s, or military pensions. This makes Tennessee popular with retirees who receive these income streams. You can withdraw from a traditional IRA at age 59½ or take distributions from a 401(k) after leaving your job, and Tennessee will not tax those withdrawals.

Roth IRA withdrawals are also untaxed by Tennessee, both the contributions you put in and the earnings you withdraw. Pension income from any source — whether a government pension, military pension, or private pension — is not taxed by the state. This applies to pensions from other states as well; if you retired from a job in another state and receive a pension, Tennessee does not tax it.

Unemployment benefits are not taxed by Tennessee either. If you received unemployment during a period of job loss, you do not owe state tax on those payments. The same applies to workers' compensation and disability benefits paid by insurance or employers.

Sales tax and property tax: where Tennessee's revenue comes from

Tennessee's statewide sales tax rate is 9.55%, one of the highest in the country. This rate combines the state sales tax of 4.55% with an average local sales tax of 5%. The exact local rate varies by county — some counties add 1.5% and others add 2.75% or more. When you buy something in Tennessee, the total sales tax you pay depends on where you are shopping.

Groceries are taxed at a lower rate in Tennessee: 4% state tax plus local tax, which is lower than the general sales tax rate. Prescription medications are not subject to sales tax. However, prepared food, restaurant meals, and non-prescription items are taxed at the full rate.

Property tax in Tennessee is based on the assessed value of real estate and is set by county. The statewide average is around 0.7% of property value per year, though this varies significantly by county. Some counties assess property at a lower percentage of market value, which reduces the tax owed. If you own a home in Tennessee, you will receive a property tax bill from your county assessor.

Moving to Tennessee from another state

If you move to Tennessee from a state with income tax, you do not owe Tennessee tax on income you earned before you arrived. Your tax obligation to Tennessee begins on the date you become a resident. For federal purposes, you report income earned in other states on your federal return, but Tennessee only taxes income earned while you were a Tennessee resident.

Determining residency can matter for tax purposes. You are generally considered a Tennessee resident if you live in the state for more than 183 days in a calendar year, or if you maintain a permanent home in Tennessee. If you moved mid-year, you may owe tax to both your old state and Tennessee for the portions of the year you lived in each. Some states have reciprocal agreements that prevent double taxation, but you should check with both states' tax departments if you moved partway through the year.

If you worked remotely for an out-of-state employer while living in Tennessee, Tennessee does not tax that income — only the state where your employer is located does. However, if you worked in another state and then moved to Tennessee, you owe tax to the state where you worked for the days you were there.

Federal taxes still explore in Tennessee

The absence of state income tax does not mean you owe no income tax at all. You still file a federal income tax return and pay federal income tax on your wages, self-employment income, and investment income. The federal tax brackets and rates explore to all Tennessee residents the same way they explore to residents of every other state.

If you are self-employed in Tennessee, you owe federal self-employment tax (Social Security and Medicare tax) on your net earnings. You also may owe federal estimated quarterly taxes if your income is not withheld by an employer. Tennessee does not add a state self-employment tax on top of the federal tax, which is one advantage of working for yourself in Tennessee.

You will still need to file a federal return even if you have no Tennessee tax owed. The federal government requires filing if your income exceeds the standard deduction for your filing status. Tennessee does not require a state return if you have no investment income, but the federal requirement remains.

Frequently Asked Questions

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

No. If your only income is wages and you have no dividends, interest, or capital gains, Tennessee does not require you to file a state return. You still must file a federal return if your income exceeds the federal standard deduction, but Tennessee has no filing requirement for wage earners with no investment income.

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

You owe tax to the state where you worked, not to Tennessee. If you worked in Kentucky and lived in Tennessee, Kentucky taxes your wages. Tennessee does not tax income earned in another state. You report the out-of-state income on your federal return and may be able to claim a credit for taxes paid to the other state.

Are retirement account withdrawals taxed by Tennessee?

No. Withdrawals from traditional IRAs, 401(k)s, pensions, and military pensions are not taxed by Tennessee. This applies whether the account was opened in Tennessee or another state. Roth IRA withdrawals are also untaxed. Social Security benefits are also not taxed by the state.

When does Tennessee's investment income tax go away completely?

The 3.75% tax on dividends, interest, and capital gains is scheduled to reach zero on January 1, 2026. After that date, Tennessee will not tax investment income. This phase-out is already law, but the legislature could change it if it votes to do so.

Is Tennessee sales tax the same everywhere in the state?

No. The statewide rate is 9.55%, but each county adds its own local sales tax on top of the state rate. Some counties have a lower local rate and others higher. The exact rate depends on where you are shopping. Groceries are taxed at 4% state plus local tax, which is lower than the general rate.