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 the way it would be in most other states.

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 tax applies to money you make from investments, savings accounts, and the sale of stocks or property — not from working.

The wage income exemption has been in place since 1943. Tennessee's approach is to fund state services through sales tax, property tax, and other revenue sources instead of taxing what people earn from employment.

Key Takeaways

  • Tennessee does not tax wages, salaries, or other income from employment, so your paycheck will not have state income tax withheld.
  • Tennessee does tax investment income — interest, dividends, and capital gains — at 3.85 percent, which is separate from federal capital gains tax.
  • Tennessee funds state services primarily through sales tax (currently 9.55 percent statewide) and property tax instead of income tax.
  • If you move to Tennessee from a state with income tax, you will not owe Tennessee income tax on wages you earned before moving, but you will owe it on investment income earned while you live there.

What types of income Tennessee does tax

Tennessee's 3.85 percent tax applies to investment income only. This includes interest earned on savings accounts, money market accounts, and certificates of deposit. It also includes dividends from stocks and mutual funds, and capital gains from selling investments at a profit.

The tax does not apply to wages from employment, self-employment income, retirement distributions from IRAs or 401(k)s, Social Security benefits, or pension income. If your income comes from working — whether as an employee or self-employed — Tennessee does not tax it at the state level.

Some types of investment income are exempt. Tennessee does not tax gains on the sale of your primary residence if you meet certain conditions, and it does not tax certain types of bonds or retirement account distributions.

How the investment income tax works in practice

If you own stocks or bonds and receive dividends, or if you sell an investment at a profit, you will owe Tennessee's 3.85 percent tax on that gain. The tax is separate from federal capital gains tax, which you will also owe to the IRS.

Most investment income is reported to you and to the state on a 1099 form by your bank or brokerage. You report this income on your Tennessee tax return, and the state calculates the tax owed. Some people pay estimated taxes quarterly if they expect to owe more than a certain amount.

If you have investment income, you will need to file a Tennessee tax return even though you do not owe tax on wages. The return is used to report and pay tax on the investment income portion.

Tennessee's sales tax and property tax instead

Because Tennessee does not tax income, the state relies heavily on sales tax to fund schools, roads, and other services. The statewide sales tax rate is 9.55 percent as of 2024, though some counties add local sales taxes on top of that. This is one of the highest sales tax rates in the country.

Tennessee also taxes property. Homeowners pay property tax based on the assessed value of their home, and renters indirectly pay property tax through rent. The property tax rate varies by county.

The combination of high sales tax and property tax means that even though Tennessee has no income tax, residents still pay significant state and local taxes — just in different forms than residents of income tax states.

What happens if you move to or from Tennessee

If you move to Tennessee from another state, you do not owe Tennessee income tax on wages you earned before you moved, even if you were paid after the move. You only owe Tennessee tax on income earned while you are a Tennessee resident.

If you move away from Tennessee, you do not owe Tennessee tax on wages earned after you leave. However, if you still own investments or property in Tennessee, you may still owe the 3.85 percent investment income tax on money those investments generate.

Your residency status for tax purposes is determined by where you live on December 31 of the tax year. If you move mid-year, you may need to file returns in both states, but each state only taxes income earned while you were a resident there.

Retirement income and Social Security in Tennessee

Tennessee does not tax retirement income, which makes it attractive to retirees. Distributions from IRAs, 401(k)s, and other retirement accounts are not subject to Tennessee state tax. Social Security benefits are also not taxed by Tennessee.

Pension income from a former employer is not taxed either. This applies whether the pension comes from a private employer or a government employer.

The only exception is investment income generated by money in those retirement accounts. If you have a brokerage account within an IRA and that account generates dividends or capital gains, those are still subject to the 3.85 percent tax — though the tax is usually paid from the account itself and does not affect your take-home pay.

Frequently Asked Questions

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

No. If your only income is wages from employment and you have no investment income, you do not need to file a Tennessee state tax return. You will still file a federal return with the IRS, but Tennessee does not require a state return.

Is Tennessee income tax withheld from my paycheck?

No. Because Tennessee does not tax wages, your employer does not withhold state income tax from your paycheck. You will see federal income tax withheld, and possibly local taxes depending on where you work, but not Tennessee state income tax.

Do I owe Tennessee tax on money I inherited?

Tennessee does not have an inheritance tax or estate tax. Money you inherit is not subject to Tennessee state tax. However, if the inherited money is invested and generates interest or dividends, you will owe the 3.85 percent tax on that investment income going forward.

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

You do not owe Tennessee income tax on your wages because Tennessee does not tax wage income. You will owe income tax to the state where you live. Most states have agreements to prevent double taxation, so you will not pay tax on the same income to both states.

Are there any deductions or credits that reduce the investment income tax?

Tennessee allows some deductions related to investment income, such as investment expenses and losses. The specifics depend on your situation. You should review the current Tennessee tax forms or speak with a tax preparer to understand what deductions may apply to your investment income.