Tennessee does not have a state income tax on wages, salaries, or most other forms of personal income
Tennessee is one of nine states with no tax on wages or salary income. You will not file a state income tax return to the Tennessee Department of Revenue for money you earn from a job, self-employment, or most other sources. This is a permanent feature of Tennessee tax law, not a temporary exemption.
However, Tennessee does tax certain types of income that other states do not. The state taxes interest and dividend income at a flat rate of 3.85 percent, though this applies only to amounts above a threshold that changes yearly. Tennessee also taxes capital gains from the sale of stocks, bonds, and mutual funds at the same 3.85 percent rate. These are the main state-level taxes you may owe as a Tennessee resident.
Your federal income tax obligations remain unchanged. You still file a federal return with the IRS and pay federal tax on all income types. Tennessee's lack of a state income tax does not reduce what you owe to the federal government.
Key Takeaways
- Tennessee imposes no tax on wages, salaries, self-employment income, or most other personal income sources.
- Tennessee taxes interest, dividends, and capital gains at 3.85 percent, but only on amounts above an annual threshold that varies by year.
- You do not file a Tennessee state income tax return unless you have income from interest, dividends, or capital gains above the threshold.
- Federal income tax is separate from state income tax, and you still owe federal tax on all income regardless of Tennessee's state policy.
Interest and dividend income: the main state tax you may owe
Tennessee's 3.85 percent tax on interest and dividends applies only to income above a threshold. For the 2024 tax year, the threshold is $1,250 for single filers and $2,500 for married couples filing jointly. This means if your interest and dividend income falls below these amounts, you owe no Tennessee state tax on that income.
Interest income includes money earned from savings accounts, money market accounts, certificates of deposit, and bonds. Dividend income includes distributions from stocks and mutual funds. If you receive these forms of income and the total exceeds the threshold for your filing status, you must report it to Tennessee and pay the 3.85 percent tax.
The threshold amount changes each year based on inflation. Check the Tennessee Department of Revenue website or your tax software for the current year's threshold before you file. Many people with modest savings or small investment portfolios fall below the threshold and owe nothing.
Capital gains tax: how Tennessee taxes investment sales
When you sell a stock, bond, mutual fund, or other investment at a profit, Tennessee taxes that gain at 3.85 percent. This applies to long-term gains (held more than one year) and short-term gains (held one year or less) at the same rate. The tax is separate from federal capital gains tax, which has different rates depending on your income level and how long you held the asset.
Capital gains from the sale of your primary residence are exempt from Tennessee tax, just as they are from federal tax (up to certain limits). Gains from rental property, investment real estate, or business assets are taxable. If you sell an investment at a loss, you can deduct that loss against gains in the same year.
You report Tennessee capital gains on Schedule C-EZ or Schedule C if you are self-employed, or on a separate form if you are reporting investment income. Your tax software or a tax professional can help you calculate and report these gains correctly.
Who must file a Tennessee tax return
You must file a Tennessee return only if your interest, dividend, or capital gains income exceeds the annual threshold for your filing status. If all your income comes from wages or salary, you do not file a state return even if you earn a high salary.
If you are self-employed, you do not owe Tennessee income tax on your business income itself. However, if your business generates interest or dividend income (for example, if you invest business profits), that investment income is subject to the 3.85 percent tax if it exceeds the threshold.
Some people file a Tennessee return even when not required to do so in order to claim a refund of taxes withheld or to report losses. If your employer withheld Tennessee tax by mistake, filing a return allows you to recover that money.
How Tennessee's no-income-tax policy affects your overall tax burden
Tennessee's lack of a wage income tax does not mean the state collects no taxes. Tennessee funds state services through sales tax, property tax, and other sources. The state sales tax rate is 9.55 percent when you combine the state rate with local rates, which is among the highest in the nation. This means Tennessee residents often pay more in sales tax than residents of states with income tax.
Whether living in Tennessee results in a lower overall tax burden depends on your personal situation. A high-wage earner with little investment income may pay less total tax in Tennessee than in a state with income tax. A retiree living on investment income and capital gains may pay more, because the 3.85 percent state tax on those sources has no federal equivalent to offset it.
If you are considering moving to Tennessee or have recently moved there, compare your total state and local taxes under both scenarios rather than focusing only on income tax. Sales tax, property tax rates, and your own income mix all matter.
How to report Tennessee income tax on your return
If you owe Tennessee tax on interest, dividends, or capital gains, you report it using Tennessee Form 1040. This is the state's basic income tax return, though you only complete it if you have income above the threshold. The form asks for your name, address, filing status, and details of your interest, dividend, and capital gain income.
You can file by mail or electronically through the Tennessee Department of Revenue's website. Electronic filing is faster and reduces errors. Many tax software programs include Tennessee forms and can file electronically on your behalf.
The important date to file is the same as the federal important date, typically April 15. If you file your federal return late, file your Tennessee return by the same date to avoid penalties. Tennessee allows an extension if you request one before the important date.
Frequently Asked Questions
Do I have to pay Tennessee income tax if I work in Tennessee but live in another state?
No. Tennessee taxes only residents on their income. If you live in another state, you file a return in your home state, not Tennessee, even if you work in Tennessee. Your home state may tax your income depending on its own rules. Some states have reciprocal agreements that affect where you file.
What if I moved to Tennessee during the year?
You are a Tennessee resident for the part of the year you lived there. If you have interest, dividend, or capital gains income above the threshold during the months you lived in Tennessee, you must report it. Your tax software can help you prorate income and calculate the correct amount owed.
Does Tennessee tax retirement income like Social Security or pensions?
No. Tennessee does not tax Social Security benefits, military pensions, or most other retirement income. This is one reason Tennessee is popular with retirees. However, if your retirement savings generate interest or dividend income above the threshold, that income is taxable.
If I have a loss on an investment, can I deduct it against my wages?
No. Tennessee, like the federal government, does not allow you to deduct investment losses against wage income. You can deduct capital losses only against capital gains in the same year. Unused losses can carry forward to future years.
What happens if I do not file a Tennessee return when I owe tax?
Tennessee can assess penalties and interest on unpaid tax. The penalty starts at 5 percent of the unpaid tax and increases if you do not pay within a certain period. Interest accrues daily. If you owe tax, filing and paying as soon as you realize it minimizes these charges.