Tennessee does not have a state income tax on wages or salaries

Tennessee is one of nine states that does not tax the income you earn from working. You will not owe state income tax on wages, salaries, tips, or other compensation for labor. This applies whether you work for an employer, are self-employed, or receive income from a job in another state while living in Tennessee.

Tennessee does tax two specific types of investment income: dividends and interest. These are taxed at a flat rate of 3.85 percent. Capital gains from selling stocks, real estate, or other assets are not taxed by the state. If you have no dividend or interest income, you owe no state income tax to Tennessee at all.

This tax structure has remained in place since 2021, when Tennessee phased out its tax on dividends and interest income completely, then reinstated it at the current 3.85 percent rate in 2022. The state funds its operations through sales tax, property tax, and other revenue sources instead.

Key Takeaways

  • Tennessee does not tax wages, salaries, or any income from work, regardless of where you work or live.
  • Tennessee taxes dividends and interest income at 3.85 percent, but does not tax capital gains.
  • If your only income is from employment, you owe no state income tax to Tennessee.
  • You may still owe federal income tax even though Tennessee has no state income tax.
  • Tennessee residents who work in other states do not owe those states' income tax on income earned in Tennessee.

What counts as taxable investment income in Tennessee

The 3.85 percent tax applies to dividends paid by corporations and mutual funds, and to interest earned from bonds, savings accounts, money market accounts, and certificates of deposit. This includes interest from Treasury bonds and other federal securities. The tax also applies to distributions from retirement accounts that consist of dividends or interest, though the retirement account itself may have its own tax rules.

Capital gains—the profit you make when you sell a stock, mutual fund, or real estate for more than you paid for it—are not subject to Tennessee's 3.85 percent tax. If you sell a rental property and make $50,000 in profit, Tennessee does not tax that gain. If you sell shares of stock and make $10,000, Tennessee does not tax that either.

Retirement account withdrawals are generally not subject to Tennessee's dividend and interest tax, because the tax applies to the income that generates the tax, not to the withdrawal itself. However, if you have a taxable brokerage account holding dividend-paying stocks or bonds, those dividends are taxable.

How the 3.85 percent tax on dividends and interest works

You report dividend and interest income on your federal tax return using IRS Form 1040 and Schedule B. Tennessee uses the same income figures you report to the federal government. You do not file a separate Tennessee state income tax return; instead, you report the tax on your Tennessee individual income tax return, which is Form INC 105.

The tax is calculated by multiplying your total dividends and interest income by 3.85 percent. If you earned $5,000 in dividends during the year, you would owe $192.50 to Tennessee. If you earned $1,000 in interest, you would owe $38.50. These amounts are due when you file your state return, which follows the same April 15 important date as your federal return.

Some financial institutions withhold Tennessee tax from dividend and interest payments automatically, similar to federal withholding. If tax was withheld, you report it as a credit against what you owe. If too much was withheld, you receive a refund; if too little was withheld, you pay the difference when you file.

Who must file a Tennessee tax return

You must file a Tennessee return if you had more than $1,250 in dividend and interest income during the year. This threshold applies to single filers, married couples filing jointly, and other filing statuses. If your only income is from wages and you have no dividend or interest income, you do not file a Tennessee return at all.

If you had dividend and interest income but it was below $1,250, you do not have to file. However, if tax was withheld from your dividends or interest, you may want to file anyway to claim a refund of the withheld amount.

Tennessee residents who work in other states should check those states' rules. Most states tax income earned within their borders, regardless of where the worker lives. However, some states have reciprocal agreements with Tennessee or do not tax wages at all. Your employer's payroll department or a tax professional can tell you whether you owe tax to another state.

Federal income tax still applies in Tennessee

Tennessee's lack of state income tax does not affect your federal tax obligation. You still owe federal income tax on all wages, salaries, self-employment income, dividends, interest, capital gains, and other income. The federal government taxes these the same way regardless of which state you live in.

Your federal tax return is due April 15 each year, the same important date as Tennessee's return. If you have federal tax withheld from your paycheck, you may receive a refund when you file your federal return. If you are self-employed, you must pay federal self-employment tax, which funds Social Security and Medicare.

Self-employment income and Tennessee taxes

If you are self-employed, you do not owe Tennessee state income tax on your business income. However, you do owe federal self-employment tax, which is separate from federal income tax. Self-employment tax is 15.3 percent of your net business income and covers Social Security and Medicare.

You report self-employment income on your federal return using Schedule C. Tennessee does not require a separate state return for self-employment income unless you also have dividend or interest income above $1,250. If you do, you file Form INC 105 to report the dividend and interest tax.

Some self-employed people also owe sales tax on goods or services they sell. Tennessee's sales tax rate varies by county but is typically between 8.5 and 9.55 percent. This is separate from income tax and is collected at the point of sale or remitted quarterly to the state.

Frequently Asked Questions

Do I owe Tennessee income tax if I work in another state but live in Tennessee?

No. Tennessee does not tax income earned outside the state. However, the state where you work may tax your wages. Most states tax income earned within their borders, so you may owe tax to that state even though you live in Tennessee. Check with your employer or that state's tax authority to be sure.

What if I moved to Tennessee from another state mid-year?

You only owe Tennessee tax on dividend and interest income earned while you were a Tennessee resident. If you moved to Tennessee on July 1, you report only the dividends and interest you received from July 1 onward. Your previous state may tax the income you earned there before you moved.

Is Social Security taxed by Tennessee?

No. Tennessee does not tax Social Security benefits. Federal income tax may explore to your benefits depending on your total income, but Tennessee has no state tax on them.

Do I have to file a Tennessee return if I had no income?

No. You only file if you had more than $1,250 in dividend and interest income during the year. If you had no income or only wage income, you do not file a Tennessee return.

Can I deduct Tennessee taxes on my federal return?

You can deduct state and local taxes (SALT) on your federal return, but only up to $10,000 total per year. Since Tennessee has no income tax, you would deduct only property tax and sales tax if you itemize deductions. Most people use the standard deduction instead, which is simpler.