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 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 at the end of the year.
However, Tennessee does tax certain types of income that are not wages. The state taxes interest and dividend income at 6 percent, though there are exemptions and thresholds that may apply depending on your age and the amount you earn. Tennessee also collects sales tax, property tax, and excise taxes on specific goods like gasoline and alcohol.
If you moved to Tennessee from a state that has income tax, or if you work across state lines, understanding which income is taxed and which is not can affect how much you owe in total state taxes.
Key Takeaways
- Tennessee taxes wages at zero percent, so no state income tax is withheld from paychecks or owed when you file taxes.
- Interest and dividend income is taxed at 6 percent in Tennessee, though residents over 59½ and certain other groups may have exemptions.
- Tennessee makes up lost income tax revenue through sales tax (9.55 percent statewide), property tax, and excise taxes on fuel and alcohol.
- If you work in Tennessee but live in another state, you typically owe income tax only to your state of residence, not to Tennessee.
What types of income Tennessee does tax
Tennessee's tax on interest and dividend income applies to money you earn from savings accounts, bonds, stocks, and mutual funds. The tax rate is 6 percent on these earnings. However, residents age 59½ or older are exempt from this tax, and there are income thresholds below which the tax does not apply — these thresholds change annually and depend on your filing status.
If you receive income from sources like rental property, self-employment, or capital gains from selling an asset, those are not taxed at the state level in Tennessee. Social Security benefits are not taxed in Tennessee either. The state also does not tax retirement income from pensions or distributions from retirement accounts like IRAs or 401(k)s.
The practical effect is that most working Tennesseans pay no state income tax at all. The interest and dividend tax affects primarily people with significant investment income, and even then, older residents are often exempt.
How Tennessee replaces income tax revenue
States without income tax must fund schools, roads, and services through other means. Tennessee's largest revenue source is sales tax. The statewide sales tax rate is 9.55 percent, though local counties can add additional sales tax on top of that, bringing the total to between 9.55 and 9.75 percent depending on where you shop. This means you pay tax on most purchases — groceries, clothing, gas, and restaurant meals all carry sales tax.
Tennessee also collects property tax, though the rate varies by county. Property tax is assessed on real estate and, in some counties, on personal property like vehicles. The state also taxes gasoline, diesel, and alcohol through excise taxes, and collects fees on vehicle registrations and licenses.
Because Tennessee relies heavily on sales tax, residents who spend more money in the state pay more in total taxes, even though they pay nothing on wages. A person earning $50,000 a year pays no income tax but pays sales tax on every purchase.
If you work in Tennessee but live elsewhere
If you live in a state with income tax and work in Tennessee, you do not owe Tennessee income tax on your wages — Tennessee has no income tax to owe. You owe income tax only to your state of residence. Your employer in Tennessee will not withhold state income tax from your paycheck because Tennessee does not collect it.
You will still owe income tax to your home state. Most states tax residents on all income earned, regardless of where the work happens. Some states have reciprocal agreements that reduce or eliminate tax on wages earned in a neighboring state, but you should check your specific state's rules or speak with a tax preparer to understand your obligation.
If you moved to Tennessee from another state
When you move to Tennessee, you stop owing state income tax on wages earned after your move date. If you moved partway through the year, your previous state may still tax you on income earned before you left. You may need to file a part-year resident return in your old state showing income only through your move date.
Your new employer in Tennessee will not withhold state income tax. If you had been receiving a refund from your previous state because too much was withheld, you will not receive that refund until you file your final return there. Some people moving to Tennessee are surprised by the change in take-home pay — without state income tax withholding, your paycheck may be larger, but you will also pay more in sales tax on purchases.
How to handle your taxes as a Tennessee resident
Because Tennessee has no income tax, you do not file a state income tax return. You still file a federal income tax return with the IRS if your income is above the threshold for your filing status. Your federal return is separate from any state return and is not affected by Tennessee's lack of state income tax.
If you have interest or dividend income, you may need to report it to Tennessee depending on the amount and your age. The Tennessee Department of Revenue publishes annual thresholds and exemptions. If you are unsure whether you owe tax on investment income, you can contact the department directly or consult a tax preparer familiar with Tennessee tax law.
Keep records of any investment income you receive during the year — 1099 forms from banks and brokerages — so you can determine whether you meet the threshold for owing tax. Most people with only wage income have no state tax filing requirement in Tennessee.
Frequently Asked Questions
Do I have to file a state tax return in Tennessee?
No, not if your only income is wages. If you have interest or dividend income above the annual threshold and are under 59½, you may need to file. Contact the Tennessee Department of Revenue or a tax preparer to confirm based on your specific income.
Will my paycheck be bigger in Tennessee because there is no state income tax?
Yes, you will not see state income tax withheld from your paycheck. However, you will pay more in sales tax on purchases in Tennessee than you might have in a state with income tax, so the overall tax burden depends on how much you spend.
What if I work for a company based in another state but work remotely from Tennessee?
You owe income tax to the state where you live, which is Tennessee. Since Tennessee has no income tax, you owe no state income tax on that income. Your employer should not withhold Tennessee state income tax because it does not exist.
Are retirement pensions taxed in Tennessee?
No. Tennessee does not tax income from pensions, 401(k) distributions, or IRA withdrawals. This is one reason many retirees move to Tennessee — they can receive retirement income without state income tax.
If I own a business in Tennessee, do I pay state income tax on the profit?
No. Business income is not taxed at the state level in Tennessee. You still file a federal return and pay federal self-employment tax, but Tennessee collects no state income tax on business earnings.