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 salaries. You will not owe Tennessee state income tax on money you earn from a job, whether you work in Tennessee or live there and work elsewhere. This applies to W-2 employees, self-employed people, and contractors.
However, Tennessee does tax two specific types of income that most other no-income-tax states do not: dividends and interest. If you receive investment income from stocks, bonds, or savings accounts, Tennessee taxes that at a flat rate of 3.85%. This tax is called the Hall Income Tax, named after the legislation that created it.
The absence of wage tax does not mean Tennessee has no state taxes. The state funds itself through sales tax, property tax, and excise taxes on items like gasoline and cigarettes. Your total state tax burden depends on what you spend and own, not what you earn.
Key Takeaways
- Tennessee does not tax wages, salaries, or self-employment income from work, so you owe no state income tax on paychecks or business earnings.
- Tennessee does tax dividends and interest income at 3.85%, which is unusual among no-income-tax states and affects investors and savers.
- Tennessee funds state services through sales tax (currently 9.55% statewide when combined with local rates), property tax, and excise taxes instead.
- If you move to Tennessee from a state with income tax, you will not owe Tennessee tax on wages, but you may still owe tax to your former state if you worked there during the year.
How the dividend and interest tax works in practice
The 3.85% tax on dividends and interest applies only to Tennessee residents. It does not matter where the investment is held or what company issued it — if you live in Tennessee and receive dividend or interest income, Tennessee taxes it.
You report this income on your Tennessee tax return, Form INC 100, which you file with the Tennessee Department of Revenue. The tax is separate from federal income tax; you will owe both. If you have $5,000 in dividend income, you owe Tennessee $192.50 (3.85% of $5,000) in addition to whatever federal tax applies to that income.
Some types of interest and dividends are exempt. Interest from U.S. Treasury bonds and notes is not taxed by Tennessee. Certain municipal bonds issued by Tennessee cities and counties are also exempt. Retirement account distributions — money you withdraw from a traditional IRA or 401(k) — are not subject to the dividend and interest tax, though they may be subject to federal income tax.
What happens if you move to or from Tennessee
If you move to Tennessee during the year, you become a Tennessee resident on the date you establish residency there. You owe Tennessee tax on dividends and interest earned after that date, but not before. If you move away from Tennessee, you stop owing the state tax once you are no longer a resident.
Residency is determined by where you maintain a permanent home and where you spend most of your time. If you own a home in Tennessee and live there most of the year, you are a resident. If you rent an apartment in Tennessee but maintain a home in another state where you spend more time, you may not be a Tennessee resident for tax purposes.
If you worked in Tennessee but moved away before the end of the year, you do not owe Tennessee income tax on your wages — Tennessee has no wage tax. However, you may owe income tax to the state where you now live, depending on that state's rules. Some states tax you on income earned within their borders even if you no longer live there.
Comparing Tennessee to other no-income-tax states
Tennessee is grouped with eight other states that do not tax wages: Alaska, Florida, Nevada, South Dakota, Texas, Washington, Wyoming, and New Hampshire. However, Tennessee is the only one of these nine that taxes dividends and interest. New Hampshire taxes interest and dividends but calls it the "interest and dividends tax" rather than an income tax, and it is phasing out that tax — it will end in 2024.
The other seven states (Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming) tax neither wages nor investment income. If you are comparing your tax burden across states, this distinction matters. A retiree living on investment income would owe no state tax in Florida but would owe 3.85% in Tennessee.
States without wage tax often have higher sales taxes to make up the difference. Tennessee's combined state and local sales tax rate varies by county but averages around 9.55%. In contrast, states with income tax often have lower sales taxes. This means your total state tax bill depends on whether you earn more than you spend.
How to file Tennessee taxes if you have dividend or interest income
You file Tennessee taxes using Form INC 100, the Individual Income Tax Return. You submit it to the Tennessee Department of Revenue. The form asks for your total dividend and interest income for the year, calculates the 3.85% tax, and shows what you owe.
If you have no dividend or interest income, you do not file a Tennessee return. Many Tennessee residents who work in the state and earn only wages never file a state return because there is no wage tax to report.
If you have dividend or interest income, you must file even if the amount is small. There is no minimum threshold. If you received $100 in interest, you report it and owe $3.85 in Tennessee tax. You file by the same important date as your federal return, typically April 15, though Tennessee allows extensions.
Why Tennessee taxes dividends and interest differently from wages
Tennessee created the dividend and interest tax in 2021 as part of a broader tax policy shift. The state wanted to reduce reliance on sales tax, which falls more heavily on lower-income households because they spend a larger share of their income on goods. By taxing investment income instead, lawmakers intended to shift some burden to people with higher incomes, who earn more from investments.
The tax was controversial. Some residents and businesses argued that taxing investment income while not taxing wages was inconsistent and would discourage people from saving and investing in Tennessee. Others supported it as a way to fund state services without raising sales tax further.
The result is that Tennessee's tax system is now unusual: it is one of the few states that taxes investment income but not wages. This creates a situation where a person earning $100,000 in salary owes no Tennessee tax, but a retiree living on $100,000 in dividends owes $3,850.
Frequently Asked Questions
Do I have to file a Tennessee tax return if I only work in Tennessee and have no investments?
No. Tennessee does not tax wages, so if your only income is from a job, you have no Tennessee tax to report. You will still file a federal return if your income exceeds the federal threshold, but Tennessee requires no state return from you.
Is interest from a savings account or money market account taxed by Tennessee?
Yes. All interest income, including interest from savings accounts, money market accounts, and certificates of deposit, is subject to the 3.85% Tennessee tax if you are a resident. The only major exception is interest from U.S. Treasury securities.
What if I live in Tennessee but work in a neighboring state that has income tax?
You owe income tax to the state where you work, not to Tennessee. Tennessee does not tax wages, so you owe nothing to Tennessee on your paycheck. However, you may be able to claim a credit on your home state return for taxes paid to the other state, depending on that state's rules.
Does Tennessee tax retirement account withdrawals?
No. Withdrawals from traditional IRAs, 401(k)s, and similar retirement accounts are not subject to Tennessee's dividend and interest tax. However, they may be subject to federal income tax depending on the type of account and your age.
If I move out of Tennessee, do I still owe tax on dividends earned while I lived there?
You owe Tennessee tax on dividends and interest earned while you were a Tennessee resident. Once you move and establish residency elsewhere, you stop owing Tennessee tax on new income. You report the income earned during the months you lived in Tennessee on your final Tennessee return.