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 eliminated its income tax on wages in 2021, completing a phase-out that began in 2020. This means your paycheck is not reduced by a Tennessee state income tax withholding, and you do not file a separate Tennessee income tax return for wages.
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 whether you live in Tennessee or not — if you earn investment income from a Tennessee source, you may owe it. The tax does not explore to income from retirement accounts like IRAs or 401(k)s, or to Social Security benefits.
Because Tennessee has no wage income tax, your federal tax filing does not change, but your state filing obligations do. You may still need to file a Tennessee return if you have investment income, even if you have no wages to report.
Key Takeaways
- Tennessee does not tax wages or salaries, so you will not see a state income tax withholding on your paycheck.
- Tennessee taxes investment income — interest, dividends, and capital gains — at 3.85 percent, regardless of where you live.
- Retirement account withdrawals and Social Security benefits are not subject to Tennessee's investment income tax.
- You may need to file a Tennessee return if you have investment income, even if you have no wages to report.
What types of income Tennessee does tax
Tennessee's 3.85 percent tax applies to interest earned on savings accounts, money market accounts, and bonds. It also applies to dividends from stocks and mutual funds, and to capital gains when you sell an investment at a profit. If you own rental property in Tennessee and collect rent, that income is not subject to the state tax. If you own a business and earn profit, that is also not taxed by the state.
The tax is straightforward to calculate: multiply your total investment income by 0.0385. If you earned $1,000 in dividends, you would owe $38.50 to Tennessee. If you earned $5,000 in interest, you would owe $192.50. You report this tax on Tennessee Form IT-103, the state's investment income return.
Some types of investment income are completely exempt. Gains from selling your primary residence are not taxed. Distributions from a traditional IRA or Roth IRA are not taxed, even though they may be taxable at the federal level. Distributions from a 401(k), 403(b), or other employer retirement plan are also exempt. Pension income is exempt as well.
Who needs to file a Tennessee investment income return
You must file Tennessee Form IT-103 if you have more than $1,250 in investment income during the tax year. This threshold applies whether you live in Tennessee or not. If you live outside Tennessee but earned investment income from a Tennessee source — for example, interest on a savings account at a Tennessee bank — you still must file if you crossed the $1,250 threshold.
The important date to file is the same as your federal return: April 15 of the following year, or the next business day if April 15 falls on a weekend or holiday. You can request an extension using federal Form 4868, which automatically extends your Tennessee filing important date as well.
If you have no investment income, or if your investment income is below $1,250, you do not file a Tennessee return. You still file your federal return as usual, but Tennessee requires nothing from you.
How investment income is reported on your federal return
Investment income appears on your federal return on Schedule B (for interest and dividends) or Schedule D (for capital gains). These are the same forms you would file whether or not you lived in Tennessee. Your federal return does not change because Tennessee has no wage tax.
When you file your federal return, you report the full amount of your investment income. You then calculate the Tennessee tax separately on Form IT-103 and pay it to Tennessee. The Tennessee tax is not deductible on your federal return, so you pay both the federal tax and the state tax on the same income.
What happens if you move to or from Tennessee
If you move to Tennessee during the year, you file a Tennessee return only for the months you lived there. You report only the investment income you earned while a Tennessee resident. If you moved away from Tennessee, you file a return only for the months before you left, reporting only income earned during that period.
If you moved from another state that taxes wages, you will notice the difference when ready in your paycheck — there will be no Tennessee state withholding. If you moved to Tennessee from another state, you may have been paying that state's income tax on wages, but you will not pay Tennessee's wage tax going forward. You may still owe that previous state's tax on income earned before you moved, so check with that state's tax authority about your filing obligations there.
Common mistakes when filing Tennessee investment income tax
The most common error is forgetting to file Form IT-103 when investment income exceeds $1,250. Many people assume that because Tennessee has no wage tax, they have no Tennessee filing obligation at all. If you have a savings account, money market account, or investment portfolio, you likely have some investment income, and you need to check whether it crosses the threshold.
Another mistake is including retirement account distributions on the investment income return. If you withdrew money from an IRA or 401(k), that withdrawal is not subject to Tennessee's investment income tax, even though it may be taxable at the federal level. Do not report it on Form IT-103.
A third mistake is misunderstanding the $1,250 threshold. This is the threshold for filing, not the threshold for owing tax. If you have $1,200 in investment income, you do not file. If you have $1,251, you file and report the full amount, including the $1,251st dollar. There is no partial filing or partial reporting.
How to calculate and pay Tennessee investment income tax
Start by gathering your investment statements from the previous year. Look for 1099-INT forms (interest), 1099-DIV forms (dividends), and 1099-B forms (capital gains). Add up all the amounts reported in Box 1 of each 1099-INT, all amounts in Box 1a of each 1099-DIV, and all net capital gains from Schedule D of your federal return.
Once you have your total investment income, multiply it by 0.0385. This is your Tennessee tax. You report this amount on Form IT-103 and send it to the Tennessee Department of Revenue. You can pay by check, electronic funds withdrawal, or credit card through the state's online payment system. The mailing address and payment instructions are on the form itself.
If you file your federal return electronically, you can file Form IT-103 electronically as well through the Tennessee Department of Revenue's website. Electronic filing is faster and reduces the chance of errors.
Frequently Asked Questions
Do I owe Tennessee tax if I live out of state but have a savings account in Tennessee?
Yes, if your investment income from that account exceeds $1,250 in the tax year. Tennessee taxes investment income regardless of where you live, as long as the income comes from a Tennessee source or you are a Tennessee resident. File Form IT-103 with the Tennessee Department of Revenue by April 15.
What if I have less than $1,250 in investment income?
You do not file a Tennessee return. The $1,250 threshold is the filing requirement, not a tax threshold. Below that amount, you owe nothing and file nothing with Tennessee, though you still file your federal return as usual.
Are Social Security benefits taxed by Tennessee?
No. Tennessee does not tax Social Security benefits, pensions, or distributions from retirement accounts like IRAs and 401(k)s. Only interest, dividends, and capital gains are subject to the state's 3.85 percent investment income tax.
Can I deduct the Tennessee investment income tax on my federal return?
No. State income taxes are not deductible on your federal return. You pay the Tennessee tax on top of your federal tax on the same investment income.
What if I sell my house — do I owe Tennessee tax on the gain?
No. Gains from selling your primary residence are exempt from Tennessee's investment income tax. If you sell a rental property or investment property, that gain may be taxable, but gains from your main home are not.