Tennessee Tax Guide 2026: Zero Income Tax and High Sales Tax Explained

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state on January 1, 2021, when the Hall Income Tax — a 6% tax on dividends and interest income — was fully repealed.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 second-highest in the USA (alongside Indiana, Mississippi and Rhode Island; only California’s 7.25% is higher), and local additions bring combined rates to between 8.5% and 9.75%. 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’s Zero Income Tax: The Hall Tax Repeal and What It Means

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.

The Phase-Out Timeline

Tennessee began phasing out the Hall Tax in 2016, reducing the rate by 1 percentage point per year:

• 2016: Rate reduced from 6% to 5%
• 2017: 4%
• 2018: 3%
• 2019: 2%
• 2020: 1%
• January 1, 2021: Full repeal — rate drops to 0%

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 repealed its interest-and-dividends tax effective January 1, 2025).

Who Benefits Most from Zero Income Tax?

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.

Tennessee vs Other No-Income-Tax States

Tennessee’s zero income tax advantage comes with one of the highest state sales tax rates in the country, making it important to consider total tax burden rather than just income tax.

Tennessee Sales Tax: The 7% Rate, Grocery Tax, and Local Add-Ons

State Sales Tax Rate: 7% — Tied for 2nd Highest in the USA

Tennessee’s 7% state sales tax rate is tied with Indiana, Mississippi and Rhode Island for the second-highest state-level sales tax rate in the country (California’s is 7.25%). Local rates add 1.5% to 2.75%, so combined rates run from 8.5% to 9.75% — among the highest combined rates nationally.

Sales Tax Rates by Major City

The Grocery Tax: A Real Burden

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 combined grocery rate to roughly 5.5%–6.75% (4% state plus 1.5%–2.75% local).

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 pays roughly $44–$54/month ($528–$648/year) in sales tax on groceries, depending on the local rate — 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.

What Is and Isn’t Taxable

• Taxable at 7% state rate: Most goods, clothing, electronics, furniture, restaurant meals, prepared food
• Taxable at 4% state rate: Food and food ingredients (unprepared groceries)
• Exempt from sales tax: Prescription drugs, certain agricultural supplies, industrial machinery

Tennessee does not tax services broadly, though specific services can be taxable. The state also runs an annual summer sales tax holiday on clothing, school supplies and computers (July 31 to August 2 in 2026) that provides temporary relief.

Property Tax, Business Taxes, and Retirement in Tennessee

Property Tax Rates

Tennessee’s average effective property tax rate of approximately 0.52% is below the median state rate of about 0.79% (Tax Foundation, 2024 data). However, there is variation within the state: Tax Foundation’s 2024 county data puts Shelby County (Memphis) at approximately 0.97%, above that median, while Davidson County is about 0.57% and Williamson County about 0.37%.

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 Business Franchise and Excise Tax

Tennessee does not have a personal income tax, but businesses operating in Tennessee face the Franchise and Excise Tax:

• Franchise Tax: 0.25% of net worth (minimum $100); the former alternative property measure was eliminated for tax years ending on or after January 1, 2024 — this is a tax on business assets, not income
• Excise Tax: 6.5% of net income for the tax year

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.

Retirement Income in Tennessee

Since the Hall Tax repeal in 2021, all retirement income is completely untaxed at the Tennessee state level:

• Social Security: Zero Tennessee state tax
• Pension income (public and private): Zero Tennessee state tax
• IRA and 401(k) distributions: Zero Tennessee state tax
• Dividends and interest: Zero Tennessee state tax (previously 6% under Hall Tax)
• Capital gains: Zero Tennessee state tax

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.