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 subject to a state income tax withholding, and you will 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, dividends, and capital gains at a flat rate of 3.85 percent. This applies whether you live in Tennessee or just earned that income there. If you have a savings account, investment account, or sold stock, you may owe Tennessee tax on the earnings, even though you pay nothing on your salary.

Key Takeaways

  • Tennessee has no state income tax on wages, salaries, or self-employment income from a job or business.
  • Tennessee taxes interest and dividend income at 3.85 percent, and this tax applies to residents and nonresidents alike.
  • You do not file a state income tax return in Tennessee unless you have interest or dividend income to report.
  • If you moved to Tennessee from another state, you may still owe taxes to your former state on income earned while you lived there.

What types of income Tennessee does tax

Tennessee's 3.85 percent tax applies to interest income (money earned from savings accounts, bonds, or certificates of deposit) and dividend income (distributions from stocks or mutual funds you own). The tax also applies to capital gains—the profit you make when you sell an investment for more than you paid for it.

This tax is separate from federal income tax. You will owe both the federal tax and the Tennessee tax on these types of income. If you have a brokerage account, bank account earning interest, or own rental property that generates income, you should expect to report that to Tennessee.

Retirement income is generally not taxed by Tennessee. Distributions from 401(k) plans, IRAs, and pensions are exempt from state tax. Social Security benefits are also not taxed by Tennessee, even though they may be taxed federally depending on your total income.

Who has to file a Tennessee tax return

You must file a Tennessee tax return only if you have interest or dividend income to report. If your only income is wages from a job, you do not file a state return. Self-employment income from a business or side work is also not subject to Tennessee state tax, so you would not file for that reason alone.

The threshold for filing depends on the type of income. If you have more than a small amount of interest or dividend income, Tennessee requires you to report it. The exact threshold changes year to year, so you should check the Tennessee Department of Revenue website or contact them directly to confirm whether your income level requires a return.

Nonresidents who earned interest or dividend income in Tennessee during the year must also file, even if they do not live in the state. This includes people who sold property in Tennessee or had investments that generated Tennessee-source income.

How to report Tennessee income tax

If you owe Tennessee tax on interest or dividends, you file using Form INC 105, the Tennessee Individual Income Tax Return. This form is separate from your federal return. You can file it on paper by mail or electronically through the Tennessee Department of Revenue website.

The filing deadline is the same as the federal deadline: April 15 of the year following the tax year. If you file your federal return late or request an extension, the same extension applies to your Tennessee return. You do not need to file both at the same time, but filing together makes tracking easier.

If you use tax software to file your federal return, many programs will also prepare your Tennessee return if you have income to report. Some software charges extra for state returns, so check before you start. The Tennessee Department of Revenue also offers free filing options for people below certain income thresholds.

Moving to or from Tennessee

If you moved to Tennessee during the year, you are a part-year resident. You owe Tennessee tax only on income earned while you lived in the state. If you moved away from Tennessee, you may still owe tax to your former state on income earned while you lived there, depending on that state's rules.

When you move, keep records of your move date and where you lived each month of the tax year. This matters because some states tax residents on all income earned during the months you lived there, while others tax only on income from sources within the state. Your former state's tax authority can tell you what you owe.

If you worked remotely for a company in another state while living in Tennessee, you generally owe tax only to Tennessee on that income. However, if you worked in another state and lived there part of the year, that state may claim tax on the income you earned while you were there. Keep your employment records and dates to sort this out if needed.

Tennessee tax on business and self-employment income

If you own a business or work as a freelancer or contractor, Tennessee does not tax your business income or self-employment income at the state level. You pay federal self-employment tax and federal income tax on that money, but not a Tennessee state income tax.

However, you may owe Tennessee sales tax if you sell goods or services to customers in Tennessee. This is a separate tax from income tax and is collected at the point of sale. If you have a business, check with the Tennessee Department of Revenue about whether you need to register for a sales tax permit.

Sole proprietors, partnerships, and S-corporations all follow the same rule: no state income tax on business earnings. C-corporations also do not pay a corporate income tax in Tennessee, though they may owe other state taxes depending on the type of business.

Frequently Asked Questions

Do I owe Tennessee tax if I work remotely for a company in another state?

No, if you live in Tennessee and work remotely for an out-of-state company, you owe tax only to Tennessee (and the federal government). The state where your employer is located generally cannot tax your income. However, if you worked in that other state for part of the year, that state may tax the income you earned while physically working there.

Is Social Security taxed in Tennessee?

No, Tennessee does not tax Social Security benefits. You may owe federal tax on Social Security depending on your total income, but Tennessee has no state tax on these payments. Pension and retirement account distributions are also exempt from Tennessee state tax.

What if I have rental property income in Tennessee?

Rental income is not subject to Tennessee state income tax. However, you must still report it to the federal government and pay federal income tax on it. Keep records of your rental expenses, as you can deduct them from your federal taxable income.

Do I need to file a Tennessee return if I only have wage income?

No. If your only income is wages from a job, you do not file a Tennessee state return. You file only a federal return. Tennessee requires a return only if you have interest, dividend, or capital gains income to report.

What happens if I do not report interest or dividend income?

The Tennessee Department of Revenue receives reports from banks and investment firms about interest and dividends paid to Tennessee residents. If you do not report income that was reported to the state, you may receive a notice and be asked to pay the tax plus penalties and interest. It is better to file and report the income when due.