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 state income tax return based on wages.
However, Tennessee does tax certain types of income that are not wages. The state taxes interest and dividend income at a flat rate of 3.85 percent, though this tax is also being phased out and will disappear entirely by 2026. If you have savings accounts, stocks, bonds, or investment accounts that generate interest or dividends, you may owe Tennessee tax on that income depending on the amount and your filing status.
The absence of wage tax does not mean Tennessee has no taxes at all. The state collects sales tax, property tax, and excise taxes on items like gasoline and alcohol. Your total tax burden depends on what you spend and own, not on what you earn.
Key Takeaways
- Tennessee does not tax wages or salaries, so you will not see a state income tax line on your paycheck.
- Interest and dividend income is taxed at 3.85 percent through 2025, then the tax phases out completely by 2026.
- You do not file a Tennessee state income tax return unless you have interest or dividend income above the filing threshold.
- Tennessee makes up lost tax revenue through sales tax (9.55 percent statewide average), property tax, and excise taxes.
Interest and dividend income: what gets taxed and what does not
Tennessee's remaining income tax applies only to interest and dividends, not to wages, self-employment income, capital gains, or retirement distributions. Interest means money earned from savings accounts, money market accounts, certificates of deposit, and bonds. Dividends are payments made to shareholders by corporations or mutual funds.
The tax rate is 3.85 percent on combined interest and dividend income. You only owe tax if your total interest and dividends exceed a threshold that depends on your filing status. For single filers, the threshold is $1,250 per year. For married couples filing jointly, it is $2,500. If your interest and dividends fall below these amounts, you owe no state tax on that income.
This tax is scheduled to disappear. The state legislature passed a law phasing it out, with the rate dropping to 2.75 percent in 2026 and the tax ending completely in 2027. Until then, if you have investment accounts generating income, you may need to report it to Tennessee.
Who has to file a Tennessee tax return
You do not file a Tennessee state tax return based on wages alone. If you earned only W-2 income from an employer, you have no state filing requirement in Tennessee, even if you live there.
You must file a Tennessee tax return if your interest and dividend income exceeds the threshold for your filing status ($1,250 for single filers, $2,500 for married filing jointly). You also file if you owe tax on that income after accounting for any deductions or credits you may claim. The return is filed with the Tennessee Department of Revenue, not with your federal return.
If you are retired and receive Social Security, pensions, or distributions from retirement accounts like IRAs or 401(k)s, Tennessee does not tax those payments. You do not file based on retirement income alone. The only exception is if those retirement accounts also generate interest or dividends that push you over the filing threshold.
How Tennessee's lack of wage tax affects your paycheck
Because Tennessee has no wage tax, your employer does not withhold state income tax from your paycheck. This means you take home more money per paycheck compared to states that tax wages. The difference varies by income level, but someone earning $50,000 per year in Tennessee keeps roughly $1,500 to $2,000 more annually than they would in a state with a 3 to 4 percent income tax.
You still pay federal income tax, and your employer still withholds that. You also pay Social Security and Medicare taxes (FICA). But the state portion of your withholding is zero. If you work in Tennessee but live in another state, you may owe income tax to your home state, depending on that state's rules and whether it has a reciprocal agreement with Tennessee.
The trade-off is that Tennessee funds state services through other taxes. Sales tax in Tennessee averages 9.55 percent statewide, which is higher than the national average. Property taxes vary by county but are generally moderate. If you spend a lot or own property, these taxes may offset the savings from no wage tax.
Self-employment income and business owners
If you are self-employed or own a business, Tennessee does not tax your self-employment income or business profits. This applies whether you operate as a sole proprietor, partnership, S-corporation, or LLC taxed as a pass-through entity. You report your business income on your federal tax return, but Tennessee has no corresponding state return for business income.
You still owe federal self-employment tax (Social Security and Medicare), which is calculated on your net business income. You also pay Tennessee sales tax if you sell goods or taxable services. If your business generates interest or dividend income from investments, that income is subject to Tennessee's 3.85 percent tax on interest and dividends.
Some business owners mistakenly believe that no state income tax means no state tax obligation at all. That is not accurate. You may owe sales tax on what you sell, property tax on business property, and excise taxes on certain goods. Check with the Tennessee Department of Revenue or a tax professional about your specific situation.
Retirement income and pensions in Tennessee
Tennessee does not tax Social Security benefits, pensions, or distributions from retirement accounts. This includes traditional IRAs, Roth IRAs, 401(k)s, 403(b)s, and other may have access to retirement plans. If you are retired and living on pension or Social Security income, you owe no Tennessee state income tax on those payments.
This rule applies regardless of how much retirement income you receive. A retiree with $100,000 in annual pension income owes no Tennessee tax on that amount. The only exception is if that retiree also has interest or dividend income that exceeds the filing threshold, in which case they file to report the investment income.
Military retirement pay is also not taxed by Tennessee. If you are a veteran receiving military pension or disability payments, those are exempt from state tax. This makes Tennessee a popular state for military retirees and federal employees with pensions.
Moving to Tennessee or leaving the state
If you move to Tennessee from another state, you stop owing income tax to your previous state once you establish residency in Tennessee. Residency is typically established when you move your permanent home, register to vote, get a driver's license, and establish other ties to the state. The exact rules vary by state, so check with your former state's tax authority about when your filing obligation ends.
If you leave Tennessee for another state, you may owe income tax to your new state starting the year you move. Some states tax you as a resident for the entire year you move, while others use a part-year resident calculation. You should file a part-year resident return with your former state if required and a resident return with your new state. Tennessee does not tax you once you move away, but your new state may.
If you work in Tennessee but live in another state, you typically owe income tax to your home state on all income, including wages earned in Tennessee. Some states have reciprocal agreements that reduce or eliminate this obligation, but you need to check the specific rules between Tennessee and your home state.
Frequently Asked Questions
Do I have to file a Tennessee tax return if I only earned wages?
No. Tennessee has no tax on wages, so you do not file a state return based on W-2 income alone. You only file if you have interest or dividend income above the threshold for your filing status ($1,250 for single filers, $2,500 for married filing jointly).
What if I moved to Tennessee mid-year?
You file a part-year resident return with your previous state for the months you lived there and a resident return with Tennessee for the months you lived in Tennessee. Your previous state may tax you on income earned while you were a resident there. Tennessee taxes only interest and dividend income, regardless of when you moved.
Does Tennessee tax capital gains?
No. Tennessee does not tax capital gains from selling stocks, real estate, or other investments. You report capital gains on your federal return, but Tennessee has no state tax on them. The only investment income Tennessee taxes is interest and dividends, at 3.85 percent through 2025.
If I have a small amount of interest income, do I still have to file?
Only if your total interest and dividend income exceeds $1,250 (single) or $2,500 (married filing jointly). Below those thresholds, you have no filing requirement and owe no tax, even if you have some interest income.
Does Tennessee tax unemployment benefits or workers' compensation?
No. Tennessee does not tax unemployment benefits, workers' compensation, or disability payments. These are not subject to state income tax. You report them on your federal return if required, but Tennessee does not tax them.