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 Tennessee state income tax on wages, salaries, tips, or other compensation from employment. This applies whether you work in Tennessee, live in Tennessee, or both.

Tennessee does tax certain types of investment income through its Hall Income Tax, which is a narrow tax on dividends and interest. This tax applies only to income from stocks, bonds, and similar investments — not to money you earn from a job. The Hall Income Tax has a threshold: you only owe it if your dividend and interest income exceeds a certain amount in a given year. That threshold changes annually and is set by state law.

Because Tennessee has no wage tax, your federal income tax withholding is the main tax you will see taken from your paycheck. State tax forms are not part of your annual filing in Tennessee for wage income.

Key Takeaways

  • Tennessee does not tax wages, salaries, or other income from employment, regardless of where you live or work.
  • Tennessee does tax investment income (dividends and interest) through the Hall Income Tax, but only above a yearly threshold that varies by year.
  • You will not file a Tennessee state income tax return for wages, but you may need to report investment income if it exceeds the Hall Income Tax threshold.
  • Federal income tax still applies in Tennessee, so you will still have federal withholding on your paycheck and will file a federal return.

How the Hall Income Tax works on investment income

The Hall Income Tax is Tennessee's only tax on personal income, and it applies only to dividends and interest. If you own stocks that pay dividends, bonds that pay interest, or money market accounts, that income may be subject to the Hall Income Tax. The tax does not explore to capital gains (profit from selling an investment at a higher price than you paid) or to retirement account distributions.

The Hall Income Tax has a threshold that must be met before you owe anything. For the 2024 tax year, the threshold is $1,250 for single filers and $2,500 for married couples filing jointly. This means you only owe the tax if your total dividends and interest income exceeds these amounts. The threshold is adjusted each year for inflation, so the amount changes annually.

The tax rate itself is a flat 5 percent on the income above the threshold. So if you are a single filer with $2,000 in dividend income, you would owe tax on $750 ($2,000 minus the $1,250 threshold) at 5 percent, which equals $37.50.

Who needs to file a Tennessee return for investment income

You must file a Tennessee return if your dividend and interest income exceeds the annual threshold. The return is Form INC, which is Tennessee's Hall Income Tax return. You file this form with the Tennessee Department of Revenue, not with your federal return.

If your investment income is below the threshold, you do not need to file a Tennessee return at all. Many Tennessee residents never file a state return because their investment income does not cross the threshold, or because they have no investment income.

Retirement account distributions — including withdrawals from IRAs, 401(k)s, and similar accounts — are not subject to the Hall Income Tax. This is an important distinction: you can withdraw money from a retirement account in Tennessee without owing state tax on it, even if the withdrawal is large.

What types of income Tennessee does not tax

Beyond wages and salaries, Tennessee does not tax Social Security benefits, pension income, or distributions from retirement accounts. If you are retired and living on a pension or 401(k) withdrawals, Tennessee will not take a state income tax on that money. This is one reason Tennessee is popular with retirees.

Tennessee also does not tax military retirement pay, disability benefits, or unemployment benefits. If you receive income from the federal government — such as Social Security, veterans benefits, or federal employee retirement — Tennessee does not tax it.

The only personal income Tennessee taxes is dividends and interest above the Hall Income Tax threshold. Everything else — wages, pensions, retirement withdrawals, government benefits — is free from Tennessee state income tax.

How Tennessee funds state government without income tax

Tennessee relies on sales tax and other taxes instead of income tax. The state sales tax rate is 9.55 percent when you combine the state rate with local rates, which varies slightly by county. Tennessee also taxes gasoline, cigarettes, alcohol, and other specific goods.

Property tax in Tennessee is lower than in many other states. The state does not tax property at the state level, though counties and cities do assess property tax locally. The rates vary by county.

Because Tennessee uses sales tax as a major revenue source, residents pay tax on purchases rather than on income. This means the tax burden falls differently depending on how much you spend versus how much you earn.

How to report investment income on your federal return

Even though Tennessee does not tax most investment income, you still report it to the federal government. Dividends and interest appear on your federal tax return on Schedule B (Interest and Ordinary Dividends). Your bank, brokerage, or investment company will send you a Form 1099-INT (for interest) or Form 1099-DIV (for dividends) by January 31 each year.

You use these forms to fill out Schedule B and report the income to the IRS. The federal tax rate on dividends and interest varies depending on your income level and the type of dividend (may have access to or ordinary). This is separate from Tennessee's Hall Income Tax.

If you have both federal tax liability on investment income and Tennessee Hall Income Tax liability, you report them on two different returns: your federal Form 1040 and Tennessee Form INC.

Frequently Asked Questions

Do I have to pay Tennessee income tax if I work in Tennessee but live in another state?

No. Tennessee does not tax income earned within the state by non-residents. If you work in Tennessee but live elsewhere, you do not owe Tennessee state income tax on your wages. You would owe income tax to your home state instead, depending on that state's rules.

What if I have dividend income from stocks — do I owe Tennessee tax on that?

Only if your total dividend and interest income exceeds the annual threshold ($1,250 for single filers in 2024). If you have $800 in dividends, you owe nothing. If you have $2,000 in dividends, you owe tax on $750 at 5 percent. The threshold changes each year.

Are retirement account withdrawals taxed by Tennessee?

No. Tennessee does not tax withdrawals from IRAs, 401(k)s, 403(b)s, or other retirement accounts. You can withdraw as much as you want from these accounts without owing Tennessee state income tax, even if the withdrawal is substantial.

Do I still file a federal tax return if I live in Tennessee?

Yes. Tennessee has no state income tax, but federal income tax still applies. You will file a federal Form 1040 with the IRS and have federal withholding taken from your paycheck, just like residents of any other state.

How do I know if I owe the Hall Income Tax?

Add up all your dividend and interest income for the year. If the total exceeds the threshold for your filing status, you owe the Hall Income Tax on the amount above the threshold. Your bank or brokerage statements and your 1099 forms will show this income. If you are unsure, the Tennessee Department of Revenue can answer questions about whether you have a filing requirement.