Tennessee No Income Tax 2026: What Residents Actually Pay

Tennessee completed its transition to a no-income-tax state on January 1, 2021. The Hall Tax — a levy on dividends and interest income — was phased down from 2017 to 2020 and repealed from 2021. Wage and salary income was never taxed in Tennessee. Since 2021, 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 local rates of up to 2.75% produces a combined rate of up to 9.75% — local tax also applies to groceries (taxed at a reduced 4% state rate). 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. Approximate annual state income tax avoided (single filer, wages only, 2026, standard deduction; state tax only, so New York City residents also pay city tax):

• $75,000 income: Save $3,453 vs New York, $2,994 vs Georgia (4.99% flat), $2,484 vs North Carolina (3.99%)
• $100,000 income: Save $4,861 vs New York, $4,242 vs Georgia, $3,481 vs North Carolina
• $150,000 income: Save $8,291 vs New York, $6,737 vs Georgia, $5,476 vs North Carolina
• Investment income at $100K dividends: Under the old Hall Tax, Tennessee residents paid 1% ($1,000) on $100,000 of dividends in its final year, 2020. Since 2021, that's $0.

The sales tax partially offsets these savings for lower incomes, since it falls on consumption. For comparison, Oregon (which has no sales tax) levies about $3,974 of state income tax at $60,000 of income (single filer, wages, standard deduction).

What Tennessee Residents Actually Pay

Sales Tax: Tennessee's 7% state sales tax is one of the highest state rates in the US. Local rates add up to 2.75%, so the combined rate reaches up to 9.75%. The Tax Foundation ranks Tennessee’s average combined rate (9.61%) second-highest in the country in 2026, behind Louisiana. 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 0.52% of market value (Tax Foundation, owner-occupied housing, 2024 data). Rates vary by county. 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 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 repeal in 2021, 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 with states that tax retirement income at ordinary rates, Tennessee retirees avoid state income tax entirely; how much that saves depends on each state’s retirement-income exclusions.

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.

What Was the Hall Tax and Why Does It Matter?

The Hall Tax was a Tennessee state tax on income from dividends and interest. 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 by one percentage point a year: 4% (2017), 3% (2018), 2% (2019), 1% (2020), and the tax was repealed for tax years beginning on or after January 1, 2021. 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.

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.