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 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. This distinction matters if you have investments, savings accounts that earn interest, or sell stocks or property for a profit.

Key Takeaways

  • Tennessee has no state income tax on wages, salaries, or tips from employment.
  • Tennessee taxes interest and dividend income at a flat rate of 3.85 percent, though some types of retirement income are exempt.
  • You do not file a state income tax return in Tennessee unless you have taxable interest or dividend income above a certain threshold.
  • Federal income tax still applies to all Tennessee residents; the absence of state income tax does not affect what you owe to the IRS.

What types of income Tennessee does tax

Tennessee's tax applies to interest income and dividend income. Interest means money earned from savings accounts, money market accounts, bonds, and certificates of deposit. Dividends are payments made to shareholders by corporations or mutual funds. Both are taxed at 3.85 percent.

Capital gains — the profit you make when you sell a stock, mutual fund, or investment property for more than you paid for it — are also subject to Tennessee tax at the same 3.85 percent rate. This applies whether the gain is short-term (held less than one year) or long-term (held one year or more).

Certain retirement income is exempt. Distributions from may have access to retirement plans, including 401(k)s, IRAs, and pensions, are not taxed by Tennessee. Social Security benefits are also exempt from state tax.

When you have to file a Tennessee tax return

You must file a Tennessee tax return only if your interest and dividend income exceeds $1,250 in a tax year. If you have no interest or dividend income, or if it falls below that threshold, you do not file a state return.

The $1,250 threshold applies to single filers and married couples filing jointly. If you are married filing separately, the threshold is $625 per person. These thresholds have remained the same for several years, though you should verify the current year's threshold with the Tennessee Department of Revenue before filing.

How federal income tax still applies in Tennessee

The absence of Tennessee state income tax does not change your federal tax obligations. You still owe federal income tax to the IRS on all income — wages, interest, dividends, capital gains, and other sources. Your employer still withholds federal tax from your paycheck, and you still file a federal return each year if your income exceeds the federal threshold.

Many people assume that living in a state with no income tax means they pay less tax overall. That is only partially true. Tennessee makes up some of the lost revenue through sales tax, property tax, and other fees. Your total state and local tax burden depends on where you live and how much you spend and own, not just on income tax.

Self-employment income and business income

If you are self-employed or own a business in Tennessee, you do not pay state income tax on your business earnings or self-employment income. However, you still owe federal self-employment tax and federal income tax on that income.

You also do not file a Tennessee state return based on business income alone. If your business generates interest or dividend income (for example, if you invest business profits), that interest and dividend income would be subject to Tennessee tax if it exceeds the $1,250 threshold.

Moving to Tennessee or leaving the state

If you move to Tennessee during the year, you do not owe state income tax on wages earned before you moved there, even if you now live in Tennessee. Your state income tax obligation is based on where you lived when you earned the income.

If you leave Tennessee during the year, you do not owe state income tax on wages earned after you moved, even if you worked for a Tennessee employer. Again, the tax obligation follows your residency at the time you earned the income.

Interest and dividend income is treated differently. If you receive interest or dividends while a Tennessee resident, that income is subject to Tennessee tax regardless of when you earned it or where you lived when you earned it. If you move out of Tennessee, interest and dividends earned after you leave are not subject to Tennessee tax.

Frequently Asked Questions

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

No. If your only income is wages, salary, or tips from employment, you do not file a Tennessee state return. You only file if you have interest or dividend income above $1,250 in the tax year.

What if I have a pension or 401(k) distribution?

Distributions from may have access to retirement plans and pensions are not taxed by Tennessee. You do not include them when calculating whether you owe state tax, and they do not count toward the $1,250 threshold for filing.

Does Tennessee tax capital gains differently than the federal government?

Tennessee taxes capital gains at 3.85 percent, the same rate as interest and dividends. The federal government has different rates depending on how long you held the asset and your income level. Both taxes apply — you owe Tennessee tax and federal tax on the same gain.

What if I work in Tennessee but live in another state?

You do not owe Tennessee income tax on your wages, even if you work in Tennessee. Your tax obligation is based on where you live, not where you work. However, the state where you live may tax your income, depending on that state's rules.

Do I still file a federal return if Tennessee has no income tax?

Yes. Tennessee's lack of state income tax does not affect your federal obligations. You file a federal return and pay federal income tax based on IRS rules, regardless of Tennessee's state tax policy.