Tennessee No Income Tax 2026: What Residents Actually Pay

Tennessee completed its transition to a no-income-tax state on January 1, 2023. The Hall Tax — a levy on dividends and interest income that dated back to 1929 — was phased down over several years and finally eliminated entirely. Wage and salary income was never taxed in Tennessee. As of 2023, no form of personal income is taxed at the state level.

Tennessee is one of the most affordable large states to live in from an income tax perspective, but the tradeoff is significant: Tennessee has one of the highest combined sales tax rates in the country. The 7% state rate plus average local rates of around 2.25% produces a combined rate of approximately 9.25% — this falls on groceries (taxed at a reduced 4% state rate) as well as general merchandise. For lower-income residents who spend most of their income on consumption, the high sales tax partially offsets the income tax saving. Higher earners and retirees with investment income tend to benefit most from Tennessee's tax structure.

Tennessee vs High-Income-Tax States: The Real Savings

Tennessee's zero income tax produces significant savings for residents relocating from high-tax states. Here are the approximate annual savings at key income levels:

• $75,000 income: Save $4,500 vs New York (6.0% effective), $2,850 vs Georgia (5.49% flat), $3,500 vs North Carolina (4.75%)
• $100,000 income: Save $6,000+ vs New York, $5,500 vs Georgia effective rate, $4,750 vs North Carolina
• $150,000 income: Save $9,000+ vs New York, $8,000 vs Georgia, $7,100 vs North Carolina
• Investment income at $100K dividends: Under the old Hall Tax, Tennessee residents paid 1% ($1,000) on $100,000 of dividends. Since 2023, that's $0.

The sales tax partially offsets these savings for lower incomes. At $60,000 income with heavy consumption spending, a Tennessee resident might pay $3,000–$4,000 more in sales tax than a resident of Oregon (no sales tax) — but still pay nothing in state income tax vs Oregon's 8.75% top rate, a $5,250 savings at that income level.

What Tennessee Residents Actually Pay

Sales Tax: Tennessee's 7% state sales tax is one of the highest state rates in the US. Combined with average local rates of approximately 2.25%, the effective rate reaches ~9.25% on most purchases. This is consistently one of the top five highest combined sales tax rates in the country. Key details: groceries are taxed at a reduced 4% state rate (not 7%), but local sales tax still applies. Prescription drugs and most medical devices are exempt. The high sales tax is the most significant ongoing cost for Tennessee residents compared to no-tax states like Oregon or Montana that have no sales tax.

Property Tax: Tennessee property taxes average approximately 0.73% of market value — below the national median of ~1.1%. Rates vary significantly by county: Shelby County (Memphis) runs higher, while rural counties are often lower. Davidson County (Nashville) effective rates are typically 0.65–0.75%. Tennessee offers property tax relief programs for low-income homeowners, elderly residents, and disabled veterans.

Business Taxes: Tennessee levies a Franchise and Excise Tax on businesses — a 6.5% excise tax on net income and a franchise tax of $0.25 per $100 of net worth. This is a business-level tax, not a personal income tax, but owners of pass-through entities (S-corps, LLCs) should consider it in total tax planning. Tennessee has historically exempted much professional service income from this tax, though recent court cases have challenged aspects of the franchise tax.

Tennessee for Retirees: Social Security, Pensions, and Investment Income

Tennessee is an excellent retirement destination from a tax perspective:

• Social Security: Fully exempt — Tennessee has no income tax, so $0 state tax on any Social Security benefits
• Pension income: Fully exempt — all pension and retirement account distributions (401k, IRA, government pensions) are state-tax-free
• Investment income: Since the Hall Tax elimination in 2023, dividends, interest, and capital gains are completely untaxed at the state level
• Required Minimum Distributions (RMDs): Fully exempt from Tennessee state tax

A retiree with $90,000/year income (Social Security + pension + investment income) would owe $0 in Tennessee state income tax. Compared to Missouri (up to 5.4% on retirement income), Georgia (up to 5.49% with limited exemptions), or Alabama (5% on pension income above thresholds), Tennessee retirees save $4,000–$5,000 annually at that income level.

Tennessee's appeal for retirees is enhanced by relatively low property taxes, a warm climate (though humid summers), and lower cost of living than coastal states. Nashville in particular has experienced rapid growth as a retirement and relocation destination.

What Was the Hall Tax and Why Does It Matter?

The Hall Tax was a Tennessee state tax on income from dividends and interest — named after Frank Hall, the state senator who introduced it in 1929. It applied to Tennessee residents who received income from stocks, bonds, bank interest, and similar investment sources. Wage earners were never subject to it — Tennessee never taxed salaries, wages, or self-employment income.

The Hall Tax rate was reduced incrementally: 6% (2015), 5% (2016), 4% (2017), 3% (2018), 2% (2019), 1% (2020), and fully eliminated effective January 1, 2021 for most taxpayers, with complete repeal January 1, 2023. For investors and retirees with significant dividend and interest income, the Hall Tax elimination is the key change — it means Tennessee is now fully income-tax-free for all residents on all income types.

The phaseout followed a 2016 law signed by Governor Bill Haslam — the culmination of a decades-long campaign by Tennessee Republicans to eliminate the tax. From a tax planning perspective, the Hall Tax repeal primarily benefits retirees, investors, and business owners with pass-through dividend income. Wage earners had always been unaffected.