Last Updated: April 2026
Tennessee completed a long journey to become a truly income-tax-free state on January 1, 2021, when the Hall Income Tax — a 6% tax on dividends and interest income — was fully repealed. Tennessee had been phasing it out since 2016, and the final elimination made Tennessee one of only nine states with no income tax of any kind. This is a significant financial advantage for investors, retirees living on investment income, and high earners relocating from states like California or New York.
The trade-off is one of the highest combined sales tax burdens in the country. Tennessee’s 7% state sales tax rate ties for the highest in the USA (alongside Indiana and Mississippi), and local additions push most residents to pay 9.25–9.75% on most purchases. Critically, Tennessee taxes groceries — at a reduced 4% state rate, but this is a notable burden on lower-income families that most states avoid by exempting groceries entirely.
This guide covers everything residents and prospective movers need to know about Tennessee’s 2026 tax landscape: the absence of income tax, the Hall Tax history, sales tax rules including the grocery tax, property taxes by county, business taxes, and how Tennessee compares to Florida, Texas, and other no-income-tax states.
Tennessee was one of the last states to retain any form of income tax. The Hall Income Tax, named after state senator Frank Hall, had been in place since 1929 and applied a 6% tax specifically on dividends and interest income — not wages or salaries (which were never taxed at the state level in Tennessee). This meant Tennessee was technically “no income tax on wages” for most of its history, but investors, retirees on investment income, and anyone receiving dividends faced a meaningful tax.
Tennessee began phasing out the Hall Tax in 2016, reducing the rate by 1 percentage point per year:
Since 2021, Tennessee has had absolutely zero state income tax on any form of income — wages, salaries, capital gains, dividends, interest, rental income, or retirement distributions. This makes Tennessee one of nine states with no income tax, alongside Florida, Texas, Nevada, Washington, Wyoming, South Dakota, Alaska, and New Hampshire (which still taxes some investment income at a flat rate, unlike Tennessee).
| Income Profile | Annual Tennessee Savings vs California (13.3% top rate) |
|---|---|
| $100,000 salary | ~$7,000–$9,000/year |
| $500,000 salary | ~$55,000–$65,000/year |
| $100,000 dividend income (retiree) | $6,000 (was taxed under Hall Tax; now zero) |
| $1,000,000 capital gain | ~$130,000 vs California top rate |
Note: Capital gains are not taxed in Tennessee at the state level. Federal capital gains tax still applies at 0%, 15%, or 20% depending on income level and holding period.
| State | Income Tax | State Sales Tax | Property Tax (avg) |
|---|---|---|---|
| Tennessee | None | 7.0% (highest tied) | 0.71% |
| Florida | None | 6.0% | 0.86% |
| Texas | None | 6.25% | 1.74% |
| Nevada | None | 6.85% | 0.53% |
| Wyoming | None | 4.0% | 0.57% |
Tennessee’s zero income tax advantage comes with the highest state sales tax rate in the country, making it important to consider total tax burden rather than just income tax.
Tennessee’s 7% state sales tax rate is tied with Indiana and Mississippi for the highest state-level sales tax rate in the country. When combined with county and city additions, most Tennessee residents pay 9.25–9.75% on most taxable purchases — among the highest combined rates nationally.
| Location | Combined Sales Tax Rate |
|---|---|
| Nashville / Davidson County | 9.25% |
| Memphis / Shelby County | 9.75% |
| Knoxville / Knox County | 9.25% |
| Chattanooga / Hamilton County | 9.25% |
| Murfreesboro / Rutherford County | 9.75% |
| Franklin / Williamson County | 9.75% |
Tennessee’s most controversial tax policy is its treatment of groceries. While most states either fully exempt groceries from sales tax (like Texas, Florida, and the majority of US states) or tax them at a significantly reduced rate, Tennessee charges a 4% state rate on food and food ingredients. Local add-ons bring the effective grocery tax to approximately 5–6% in most counties.
This has a disproportionate impact on lower-income households, who spend a higher percentage of their income on food. A family spending $800/month on groceries in Memphis pays roughly $48/month or $576/year in sales tax on groceries — a cost that would be zero in Florida or Texas. Tennessee has periodically offered temporary grocery tax holidays (including a 30-day suspension in 2022), but the base tax remains in place.
Tennessee does not tax services broadly, though specific services can be taxable. The state also has annual sales tax holidays (back-to-school supplies in July, food in August) that provide temporary relief.
Tennessee’s average effective property tax rate of approximately 0.71% is below the national average of around 1.1%. However, there is significant variation within the state: Memphis/Shelby County has one of the highest property tax rates in Tennessee at approximately 1.3%, while most rural counties and suburban Nashville areas sit in the 0.6–0.8% range.
| County/Area | Approximate Effective Rate | Annual Tax on $400,000 Home |
|---|---|---|
| Nashville / Davidson County | 0.75% | ~$3,000 |
| Memphis / Shelby County | 1.30% | ~$5,200 |
| Knoxville / Knox County | 0.72% | ~$2,880 |
| Franklin / Williamson County | 0.55% | ~$2,200 |
| Murfreesboro / Rutherford County | 0.68% | ~$2,720 |
Tennessee offers a Property Tax Relief Program for low-income elderly homeowners (65+) and disabled veterans, providing a rebate of a portion of property taxes paid. Requirements and amounts vary by county.
Tennessee does not have a personal income tax, but businesses operating in Tennessee face the Franchise and Excise Tax:
Most LLCs, corporations, and other business entities with nexus in Tennessee are subject to these taxes. Sole proprietors and single-member LLCs treated as disregarded entities may have different treatment. This is an important distinction for entrepreneurs and business owners attracted to Tennessee’s zero personal income tax — the business itself still faces meaningful taxes.
Since the Hall Tax repeal in 2021, all retirement income is completely untaxed at the Tennessee state level:
This makes Tennessee an increasingly popular retirement destination, particularly for retirees with significant investment income who previously faced the Hall Tax. The warm climate, lower cost of living outside major metros, and zero state income tax make it competitive with Florida as a retirement destination.
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Talk to a Tennessee CPA About Your Taxes →No — Tennessee has zero state income tax of any kind since January 1, 2021. The Hall Income Tax, which previously taxed dividends and interest income at 6%, was fully repealed after a multi-year phase-out. Tennessee does not tax wages, salaries, capital gains, dividends, interest, rental income, pension distributions, Social Security, or any other form of income at the state level. Only federal income tax applies to Tennessee residents.
The Hall Income Tax was a Tennessee tax that applied specifically to dividends and interest income at a rate of 6%. It was named after state senator Frank Hall and had been in place since 1929. Unlike most state income taxes, it did not apply to wages or salaries — only investment income. Tennessee began phasing it out in 2016, reducing the rate by 1% per year until it reached zero in 2021. The repeal was driven by a desire to attract retirees and investors to Tennessee, and to compete with neighboring states like Florida and Texas for mobile high-net-worth individuals.
Tennessee relies heavily on sales tax to fund state government because it has no income tax. The 7% state rate is tied for the highest in the USA (alongside Indiana and Mississippi). The state compensates for the absence of income tax revenue by applying sales tax broadly — including on groceries at a 4% rate, which is unusual nationally. When local county and city rates are added, most Tennessee residents pay 9.25–9.75% on most purchases, making Tennessee’s combined sales tax burden among the highest in the country.
Yes — Tennessee taxes grocery food and food ingredients at a 4% state sales tax rate, plus local add-ons. This is notably different from most states, which either fully exempt groceries or charge no sales tax at all. In Tennessee, a grocery bill of $200 in Nashville incurs about $9.25–11 in sales tax. Restaurant meals and prepared food are taxed at the full 9.25–9.75% combined rate. Tennessee does offer occasional grocery tax holiday periods, but the base grocery tax remains part of the regular tax structure.
Generally yes — Tennessee’s statewide average effective property tax rate of approximately 0.71% is below the national average of around 1.1%. However, Memphis/Shelby County is a significant exception at approximately 1.3%, which is above the national average. Suburban Nashville counties like Williamson County are among the lowest in the state at around 0.55%. Tennessee offers property tax relief programs for elderly and disabled veterans. Overall, for most of the state outside Memphis, property taxes are relatively affordable compared to the national average.
Yes, particularly since the Hall Tax repeal in 2021. Tennessee no longer taxes any form of retirement income — Social Security, pensions, IRA distributions, dividends, and interest are all completely exempt from state income tax. Property taxes are below average (outside Memphis). The main tax disadvantage for retirees is the high sales tax, including the 4% grocery tax, which increases the cost of daily living. For retirees with significant investment portfolios, the zero tax on dividends and capital gains is a major financial benefit that previously was offset by the Hall Tax.
Yes. While individuals pay no state income tax, Tennessee businesses are subject to the Franchise and Excise Tax: a 0.25% franchise tax on net worth and a 6.5% excise tax on net income. Most LLCs, corporations, and partnerships with Tennessee nexus file and pay these taxes. This is an important consideration for entrepreneurs and business owners who relocate to Tennessee expecting a completely tax-free environment — their business entity will still face meaningful state taxation on profits and assets.
All three states have zero income tax, but they differ significantly on other taxes. Florida has no income tax, a moderate 6% state sales tax (with local add-ons to ~7–8%), and average property taxes of 0.86%. Texas has no income tax but much higher property taxes at ~1.74% average and a 6.25% state sales tax. Tennessee has the highest sales tax rate of the three at 7% state (9.25–9.75% combined), lower property taxes than Texas, and uniquely taxes groceries at 4%. For high earners, all three offer similar income tax savings. The right choice depends on spending patterns, property ownership, and lifestyle.