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 eliminated its tax on wages in 2021, completing a phase-out that began in 2020. This means your paycheck is not reduced by a state income tax withholding, and you do not file a separate state income tax return for wages.
However, Tennessee does tax certain other forms of income. The state taxes interest and dividend income at a flat rate of 3.85 percent, though this tax is scheduled to phase out by 2026. If you receive income from investments, savings accounts, or stock dividends, you may owe Tennessee tax on that money even though you owe nothing on wages.
The lack of state income tax on wages does not mean Tennessee has no taxes at all. The state funds itself through sales tax, property tax, and other revenue sources. Your total tax burden in Tennessee depends on where your income comes from and what you buy and own.
Key Takeaways
- Tennessee does not tax wages or salary income, so nothing is withheld from your paycheck for state income tax.
- Tennessee does tax interest and dividend income at 3.85 percent, though this rate is scheduled to end by 2026.
- You do not file a Tennessee state income tax return if your only income is from wages, but you may need to file if you have investment income.
- Tennessee funds state services through sales tax (currently 9.55 percent statewide) and property tax instead of income tax.
What income Tennessee does and does not tax
Tennessee's tax code separates income into categories. Wages, salaries, tips, and other compensation from employment are not taxed. Self-employment income from a business or trade is also not taxed by Tennessee, though you still owe federal self-employment tax and federal income tax.
Interest income and dividend income are taxed at 3.85 percent. This includes interest from savings accounts, money market accounts, certificates of deposit, and bonds. It also includes dividends from stocks and mutual funds. If you have a substantial amount of money in savings or investments, you will owe Tennessee tax on the earnings those accounts generate.
Capital gains — the profit you make when you sell an investment for more than you paid for it — are not taxed by Tennessee. Retirement account distributions, Social Security benefits, and pension income are also not subject to Tennessee state income tax.
How the interest and dividend tax works in practice
The 3.85 percent tax on interest and dividends is collected by financial institutions. Banks, brokerage firms, and other entities that pay you interest or dividends are responsible for withholding the tax and sending it to the Tennessee Department of Revenue. You do not calculate this tax yourself on a return; the withholding happens automatically.
If you receive a Form 1099-INT (for interest income) or Form 1099-DIV (for dividend income), the amount shown on that form is subject to the 3.85 percent tax. The financial institution should show the withholding on your statement or a separate tax document. Keep these records for your files, though you typically do not need to file a state return to report this income.
The tax is scheduled to phase out completely by 2026. Starting in 2024, the rate began declining. By January 1, 2026, Tennessee will no longer tax interest and dividend income. After that date, all forms of personal income will be untaxed in Tennessee.
Whether you need to file a Tennessee tax return
If your only income is wages from employment, you do not file a Tennessee state income tax return. Tennessee does not require a return for wage earners because there is no tax to report. Your employer may send you a W-2 form for federal purposes, but Tennessee does not use it.
If you have interest or dividend income, you generally do not need to file a return either, because the tax is withheld automatically by the financial institution. However, if you believe the withholding was incorrect or if you want to report the income for record-keeping purposes, you can file a return voluntarily.
If you are self-employed, you do not owe Tennessee income tax on your business income, so you do not file a Tennessee return for that reason. You still must file a federal return and pay federal self-employment tax. Some self-employed people file a Tennessee return anyway to document their income for other purposes, such as obtaining credit or proving income to a landlord.
How Tennessee's sales tax and property tax affect your total tax burden
Tennessee makes up the revenue it does not collect from income tax through a high sales tax. The statewide sales tax rate is 9.55 percent as of 2024, though some counties add local sales taxes on top of that. When you buy goods or services in Tennessee, you pay this tax at the register. Groceries are taxed at a lower rate (4 percent), but most other purchases are subject to the full rate.
Property tax in Tennessee is relatively low compared to other states. The average effective property tax rate is around 0.7 percent of home value, though rates vary by county. If you own a home or land in Tennessee, you pay property tax to your county assessor based on the assessed value of the property.
Because Tennessee has no income tax, residents who earn significant wages pay less in state taxes than residents of states with income tax, but they may pay more in sales tax and property tax depending on their spending and property ownership. A person who earns $50,000 in wages pays zero Tennessee state income tax, but pays sales tax on every purchase and property tax if they own real estate.
How to report Tennessee income on your federal tax return
Even though Tennessee does not tax your income, the federal government does. You must file a federal income tax return if your income exceeds the federal threshold for your filing status. For 2024, a single person with more than $14,600 in income must file; the threshold is higher for married filers and dependents.
Report all income on your federal return, including wages, self-employment income, interest, and dividends. The fact that Tennessee does not tax it does not change your federal reporting obligation. Use the same W-2 forms, 1099 forms, and other documents you would use in any state.
Tennessee does not offer a state income tax deduction on your federal return because there is no state income tax to deduct. If you moved to Tennessee from another state and paid income tax to that state in the year you moved, you may be able to deduct that tax on your federal return, but only for the months you lived in the other state.
Frequently Asked Questions
Do I need to change my tax withholding if I move to Tennessee?
If you move to Tennessee and your employer has been withholding Tennessee state income tax, contact your payroll department and ask them to stop. Provide them with your new Tennessee address. You should not have Tennessee tax withheld from your paycheck. Your federal withholding remains the same regardless of which state you live in.
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 a state with income tax and work in Tennessee, you file a return in your home state and report all your income there. Tennessee does not tax your wages even though you earned them there. Your home state may offer a credit for taxes paid to other states, but check your state's rules.
Does Tennessee tax retirement income or Social Security?
No. Tennessee does not tax Social Security benefits, pension income, distributions from retirement accounts like 401(k)s and IRAs, or other retirement income. This is one reason Tennessee is popular with retirees. However, you still owe federal income tax on most retirement income, so you must file a federal return.
Will the interest and dividend tax really go away in 2026?
Yes, Tennessee law currently phases out the 3.85 percent tax on interest and dividend income completely by January 1, 2026. After that date, no personal income will be taxed by Tennessee. However, tax laws can change if the legislature votes to change them, so confirm the current status closer to 2026 if you have substantial investment income.
Is there a Tennessee tax on gambling winnings or lottery prizes?
Tennessee does not have a state income tax on lottery winnings or gambling winnings. However, the federal government taxes these as income, and you must report them on your federal return. If you win a large prize, the organization paying you will issue a tax form and may withhold federal tax automatically.