Tennessee does not have a state income tax on wages, salaries, or most other forms of personal income

Tennessee eliminated its state income tax on wages and salaries in 2021, making it one of nine states with no tax on earned income. If you work in Tennessee or live there, you do not pay state income tax on your paycheck. This is a significant difference from most other states, where state income tax can range from 1% to over 13% of your earnings.

However, Tennessee does tax certain types of income that other states might not. The state taxes interest and dividend income at a flat rate of 3.85%, though there are exemptions and deductions available. Understanding which income is taxed and which is not matters for your overall tax planning, especially if you have investment income or receive income from multiple sources.

Key Takeaways

  • Tennessee has no state income tax on wages, salaries, tips, or self-employment income from a business.
  • Tennessee taxes interest and dividend income at 3.85%, but you may be able to exclude some or all of this income depending on your age and total income.
  • You still file a Tennessee tax return if you have interest or dividend income above the filing threshold, even though wage income is not taxed.
  • Federal income tax still applies to all your income, so living in Tennessee does not eliminate your federal tax obligation.
  • 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 income Tennessee does not tax

Tennessee does not tax wages, salaries, tips, bonuses, or any other compensation you receive from an employer. Self-employment income from a business you own is also not taxed at the state level. This means if your income comes entirely from working for an employer or running your own business, you will have no Tennessee state income tax liability.

Retirement income is also exempt from Tennessee state tax. Distributions from 401(k) plans, IRAs, pensions, and annuities are not subject to state income tax. Social Security benefits are not taxed by Tennessee either. This makes Tennessee an attractive state for retirees who want to keep more of their retirement income.

What Tennessee does tax: interest and dividends

Tennessee taxes interest income and dividend income at a flat rate of 3.85%. This includes interest from savings accounts, money market accounts, bonds, and CDs. It also includes dividends from stocks and mutual funds, as well as capital gains distributions from mutual funds.

However, you may not owe tax on all of this income. Tennessee allows an exemption of $1,250 per person per year for interest and dividend income if you are under 65, and $1,250 per person per year if you are 65 or older (though the exemption structure may vary). You should check the current year's filing instructions from the Tennessee Department of Revenue, as exemption amounts can change. Additionally, if your total income falls below the filing threshold, you may not need to file a Tennessee return at all.

Federal taxes still explore in Tennessee

Living in Tennessee does not reduce your federal income tax obligation. You still owe federal income tax on all your income — wages, self-employment income, interest, dividends, and other sources — at the federal rates that explore to your filing status and income level. Tennessee's lack of state income tax is a benefit on top of your federal tax, not instead of it.

When you file your federal return, you report your total income and calculate your federal tax. Your Tennessee state tax situation is separate. If you have interest or dividend income, you file a Tennessee return in addition to your federal return. If you have only wage income, you do not file a Tennessee return, but you still file your federal return as usual.

Moving to Tennessee from another state

If you moved to Tennessee during the year, you may owe taxes to both your former state and Tennessee, depending on when you moved and where you earned your income. Most states tax income based on where you earned it, not where you live on December 31. If you worked in another state for part of the year and earned wages there, that state may still tax that income even though you now live in Tennessee.

You will need to file a part-year resident return in your former state showing only the income you earned while you lived there. Tennessee will not tax that income. Some states offer credits for taxes paid to other states, which can reduce your overall tax burden. If you moved mid-year, contact your former state's tax department to understand your filing obligations there.

How to file if you have interest or dividend income

If you have Tennessee taxable interest or dividend income above the filing threshold, you must file Form INC-100 (Tennessee Individual Income Tax Return) with the Tennessee Department of Revenue. You report your interest and dividend income, claim any exemptions you are may have access to to, and calculate your tax at the 3.85% rate.

You can file online through the Tennessee Department of Revenue website, by mail, or through a tax professional. The filing important date is the same as your federal return important date, typically April 15. If you file your federal return electronically, you can also file your Tennessee return electronically. If you owe Tennessee tax, you pay it with your return. If you overpaid, you can request a refund.

Tax planning with no wage income tax

Tennessee's lack of wage income tax creates planning opportunities, especially if you are self-employed or have significant investment income. Because wages are not taxed, maximizing your business income or taking a larger salary from your own business does not increase your state tax burden. This differs from states with income tax, where higher wages mean higher state taxes.

For investment income, you may want to consider the timing of when you realize capital gains or receive dividends, since these are subject to the 3.85% state tax. Tax-loss harvesting (selling losing investments to offset gains) can reduce your taxable investment income. Holding investments longer to may have access to for long-term capital gains treatment at the federal level is still valuable, even though Tennessee does not distinguish between short-term and long-term gains for state purposes.

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, salaries, or self-employment income from a business, you do not file a Tennessee return. You still file your federal return as usual. You only file a Tennessee return if you have interest or dividend income above the filing threshold.

Is Social Security taxed in Tennessee?

No. Tennessee does not tax Social Security benefits. You do not report Social Security income on your Tennessee return. However, you may still need to file a federal return if your total income exceeds the federal filing threshold, and Social Security may be taxable at the federal level depending on your other income.

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

You do not owe Tennessee state income tax on your wages, since Tennessee has no wage income tax. However, your home state may tax your income if you are a resident there. You would file a return in your home state and report the income you earned in Tennessee. Some states offer credits for taxes paid to other states.

Does Tennessee tax capital gains?

Capital gains are taxed as part of dividend and interest income at the 3.85% rate, but only if they are distributed to you by a mutual fund or similar investment vehicle. If you sell a stock or other investment directly and realize a gain, that gain is not subject to Tennessee state tax. Only investment income that flows to you as interest or dividends is taxed.

Can I deduct state income tax paid to another state on my Tennessee return?

Tennessee does not allow a deduction for income taxes paid to other states on your Tennessee return, since most of your income is not subject to Tennessee tax anyway. However, you may be able to claim a credit on your federal return for taxes paid to other states, which reduces your federal tax liability.