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. This means your paycheck is not reduced by a state income tax withholding, and you do not file a state income tax return for wages.
However, Tennessee does tax certain types of income that are not wages. The state taxes interest, dividends, and capital gains at a flat rate. This tax applies to investment income, not to money you earn from working. If you have a job but no investments, you owe no state income tax to Tennessee.
You still owe federal income tax. The absence of state income tax does not change what you owe to the IRS. You will file a federal return and pay federal tax based on your income, filing status, and deductions.
Key Takeaways
- Tennessee collects no income tax on wages, salaries, or self-employment income from a job or business.
- Tennessee does tax investment income — interest, dividends, and capital gains — at a flat rate of 5 percent.
- You still owe federal income tax even though Tennessee has no state income tax.
- If you move to Tennessee from another state, you do not need to file a state income tax return for wages earned in Tennessee.
- Retirees receiving Social Security or pension income owe no Tennessee state tax on those payments.
What types of income Tennessee does tax
Tennessee taxes investment income at a flat rate of 5 percent. This includes interest earned on savings accounts and bonds, dividends from stocks, and capital gains from selling investments at a profit. If you have a brokerage account, rental property, or other investments that generate income, you report that to Tennessee and pay tax on it.
The state does not tax Social Security benefits, pension income, or retirement account withdrawals. If you are retired and living on Social Security or a pension, you owe no Tennessee state tax on that income. This applies whether you are a Tennessee resident or moved there after retiring.
Self-employment income from running a business is not taxed by Tennessee. If you are a freelancer, contractor, or small business owner, Tennessee does not take a cut of your earnings. You still owe federal self-employment tax and federal income tax, but not to the state.
How the lack of income tax affects your paycheck
Your paycheck will not have a line for Tennessee state income tax. If you work in Tennessee or for a Tennessee employer, you see federal tax withheld, Social Security tax, Medicare tax, and any local taxes your city or county charges. You do not see a state income tax deduction.
This means more of your gross pay stays in your paycheck compared to working in a state with income tax. The difference varies depending on your income and the tax rate in other states, but it is a real increase in take-home pay. Some people move to Tennessee specifically for this reason.
If you move to Tennessee from a state with income tax, your paycheck will change. You will no longer have state income tax withheld. Make sure you understand how this affects your budget and whether you need to adjust your spending or savings.
What happens if you move to Tennessee from another state
When you move to Tennessee, you stop owing income tax to your previous state on income earned after you move. You do not file a Tennessee state income tax return for wages. However, your old state may require you to file a final return for the part of the year you lived there.
If you have investment income, you report it to Tennessee using Form IT-103 or another state form, depending on the type of income. The state's Department of Revenue website lists the forms and instructions. You do not need to contact the state directly — you file the form with your records or when required.
If you are receiving a pension or Social Security from your previous state, Tennessee does not tax it. You owe no state tax on retirement income regardless of where you earned it or where you now live.
Local taxes in Tennessee cities and counties
Some Tennessee cities and counties charge a local income tax even though the state does not. Nashville, Memphis, and Knoxville do not have local income taxes, but other municipalities do. Before you move or take a job in a specific city, check whether that city or county taxes income.
Local income tax rates and rules vary by location. Some cities tax only wages; others tax investment income as well. The best way to find out is to contact the city or county tax assessor's office or check their website. If you work in one city and live in another, you may owe tax to both.
Local taxes are separate from state tax. Even though Tennessee has no state income tax, you may still owe local tax depending on where you live and work. This is a real cost that affects your paycheck, so confirm the rules for your specific location.
How Tennessee funds state services without income tax
Tennessee funds state government through sales tax, property tax, and other revenue sources instead of income tax. The state has a higher sales tax rate than many other states to make up for the lack of income tax. This means you pay more in sales tax when you buy goods and services.
Tennessee also taxes businesses and collects excise taxes on items like gasoline and alcohol. These revenue sources replace what other states collect through income tax. The overall tax burden varies by person — someone who spends a lot pays more in sales tax, while someone who saves money pays less.
Property taxes in Tennessee are relatively low compared to other states, but they vary by county. If you own a home, you pay property tax to your county, not to the state. The rate depends on your county's assessment and tax rate.
Frequently Asked Questions
Do I have to file a Tennessee tax return if I work in Tennessee?
No. If your only income is wages from a job, you do not file a Tennessee state return. You file a federal return with the IRS. If you have investment income, you may need to file a Tennessee form depending on the amount and type of income.
What if I live in one state and work in Tennessee?
You do not owe Tennessee income tax on your wages because Tennessee has no income tax. You may owe income tax to the state where you live. Check your home state's rules about taxing residents who work out of state.
Does Tennessee tax retirement income or Social Security?
No. Tennessee does not tax Social Security, pensions, or withdrawals from retirement accounts like 401(k)s or IRAs. If you are retired and living on these income sources, you owe no Tennessee state tax.
If I sell a house in Tennessee, do I owe state tax on the profit?
If you sell your primary home, you do not owe Tennessee tax on the profit because Tennessee does not tax capital gains on primary residences. If you sell investment property or a second home, you may owe tax on the gain. Consult a tax professional for your specific situation.
What is the sales tax rate in Tennessee?
Tennessee's state sales tax is 9.55 percent, but the rate varies by county because counties add local sales tax on top of the state rate. Some counties charge 9.75 percent or higher. Check your county's rate when budgeting for purchases.