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

Tennessee is one of nine states with no tax on wages, salaries, or self-employment income. If you work and live in Tennessee, you do not owe state income tax on what you earn. This applies whether you are a W-2 employee, self-employed, or a business owner.

The state does tax certain types of income — specifically investment income like dividends and capital gains — but not work income. This distinction matters because it shapes how you file taxes and what you owe the state.

Federal income tax still applies. Tennessee's lack of state income tax does not change what you owe to the IRS. You file federal taxes the same way as someone in any other state.

Key Takeaways

  • Tennessee has no state income tax on wages, salaries, or self-employment income, so you will not owe the state anything on work earnings.
  • Investment income — dividends, capital gains, and interest — is taxed by Tennessee at rates between 1% and 5.75%, depending on the type.
  • You still file federal income tax with the IRS; Tennessee's lack of state tax does not affect federal filing.
  • Retirement income from IRAs, 401(k)s, pensions, and Social Security is exempt from Tennessee state tax.

What types of income Tennessee does tax

While Tennessee does not tax work income, it does tax investment income. This includes dividends from stocks, capital gains from selling investments, and interest earned on savings accounts or bonds. The state calls this the Hall Income Tax.

The tax rate on investment income varies by type. Dividends and capital gains are taxed at 5.75%. Interest income is taxed at 1%. These rates apply to income above certain thresholds — small amounts of investment income may not be taxed at all, depending on your total income and filing status.

Retirement income is generally not taxed. Distributions from IRAs, 401(k)s, and pensions are exempt from Tennessee state tax. Social Security benefits are also not taxed by the state.

How moving to Tennessee affects your taxes

If you moved to Tennessee from a state with income tax, you may have paid that state's tax during the year you moved. Tennessee allows you to claim a credit for taxes paid to another state during the year of your move, but only for the portion of the year you lived there.

For example, if you moved to Tennessee on July 1 and paid six months of state income tax to your previous state, you can claim a credit for that amount when you file your federal return. You do not owe Tennessee state income tax for the months you lived there, but you still owe federal tax for the full year.

If you moved from Tennessee to another state, you may owe that state's income tax starting the day you established residency there. The timing of your move and when you change your address with your employer affects when the tax obligation begins.

Self-employment and business income in Tennessee

Self-employment income is not taxed by Tennessee. If you are a freelancer, contractor, or small business owner, you do not owe Tennessee state tax on your net business income. This applies to sole proprietors, partners, and S-corporation owners.

You still owe federal self-employment tax and federal income tax. The state tax savings do not apply to what you pay the IRS. You also may owe sales tax on goods you sell, depending on what your business does.

If your business generates investment income — such as rental property income or dividends from business investments — that income may be subject to Tennessee's investment tax. The distinction between business income and investment income can be complex; a tax preparer familiar with Tennessee law can clarify what applies to your situation.

Filing requirements when you have investment income

Most Tennessee residents do not file a state tax return because the state does not tax wages. However, if you have investment income subject to the Hall Income Tax, you may need to file a return with the Tennessee Department of Revenue.

The filing threshold depends on your age, filing status, and the type of investment income you received. The threshold changes each year, so you should check the current year's requirements on the Tennessee Department of Revenue website or with a tax preparer. If your investment income falls below the threshold, you do not need to file a state return.

Even if you do not owe Tennessee tax, you still file your federal return with the IRS as usual. The two filings are separate, and federal requirements do not change based on Tennessee's state tax rules.

Frequently Asked Questions

Do I still have to file a Tennessee tax return if I have no state income tax?

No, unless you have investment income. Most people do not file a state return because Tennessee does not tax wages. If you have dividends, capital gains, or interest income above the filing threshold, you may need to file — check the current threshold with the Tennessee Department of Revenue.

Does Tennessee tax retirement income or Social Security?

No. Distributions from IRAs, 401(k)s, pensions, and Social Security benefits are all exempt from Tennessee state tax. This applies regardless of how much retirement income you receive.

If I work in Tennessee but live in another state, do I owe Tennessee tax?

No. Tennessee taxes residents on income earned anywhere, but does not tax non-residents on income earned in the state. If you live in another state and work in Tennessee, you owe tax to your state of residence, not Tennessee.

What if I have rental property income in Tennessee?

Rental income is generally treated as business income and is not taxed by Tennessee. However, if you have investment income from the rental property — such as interest or capital gains — that portion may be subject to the Hall Income Tax. A tax preparer can help determine what portion of your rental income falls into each category.

Can I deduct Tennessee taxes on my federal return?

You cannot deduct Tennessee state income tax because Tennessee does not have a state income tax on wages. If you paid investment tax to Tennessee, you may be able to deduct it as part of your state and local taxes (SALT) on your federal return, subject to the $10,000 annual cap.