Tennessee is gaining attention across the U.S. not just for its natural beauty, friendly communities, and music heritage but also for its tax-friendly environment. Whether you’re considering moving to Tennessee, planning your retirement, or simply evaluating your financial future, understanding the state’s tax structure is essential.
In this guide, we’ll break down the key tax categories income tax, property tax, sales tax, and retirement tax to help you decide whether Tennessee’s tax system is right for you.
1. Does Tennessee Have State Income Tax?
No, Tennessee does not tax earned income.
This is one of the most attractive tax benefits for individuals and families moving from high-income-tax states like California, New York, or Illinois.
What’s Tax-Free:
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Wages
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Salaries
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Bonuses
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Freelance/Contractor income
Tennessee used to tax interest and dividend income (known as the Hall Income Tax), but that was fully repealed in 2021. Now, Tennessee has zero personal income tax period.
2. Property Taxes in Tennessee
Tennessee’s property taxes are below the national average, making it one of the more affordable states for homeowners.
Average Effective Property Tax Rate:
0.71% (National average is approx. 0.99%)
Example:
If your home is worth $250,000, your annual property tax in Tennessee would be around $1,775.
Local Variation:
Property tax rates vary by county, with rural counties generally having lower rates. For example:
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Williamson County (suburban Nashville) — higher due to quality schools and services
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Sevier County (near the Smoky Mountains) — lower average tax burden
Tip: Tennessee offers property tax relief and freeze programs for seniors and disabled homeowners.
3. Sales Tax in Tennessee
Tennessee has a high sales tax, which offsets the revenue loss from not having an income tax.
State Sales Tax Rate: 7%
Local Sales Tax (Average): 2.5%
Total Combined Average: Around 9.5%
This makes Tennessee’s overall sales tax one of the highest in the country. However, it only affects you based on spending habits, not earnings or homeownership.
What’s Taxed:
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Clothing
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Electronics
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Restaurant meals
What’s Not Taxed or Reduced:
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Groceries: Taxed at a lower rate (4%)
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Prescription medications: Tax-exempt
4. Are Retirement Taxes Friendly in Tennessee?
Yes, Tennessee is highly tax-friendly for retirees.
No Tax on:
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Social Security benefits
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Pensions
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IRA or 401(k) withdrawals
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Investment income (interest/dividends, as of 2021)
Additional Senior Tax Benefits:
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Property tax relief programs for low-income seniors
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No estate or inheritance tax
This makes Tennessee a great option for retirees looking to stretch their retirement savings.
5. Business Taxes in Tennessee
If you’re self-employed or running a business, it’s important to understand Tennessee’s business tax structure.
Key Business Taxes:
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Franchise & Excise Tax: Applies to LLCs and corporations
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Business Tax (Gross receipts): Based on revenue category
Small sole proprietors often pay minimal or no business tax, depending on earnings and location.
6. Tax Summary: Is Tennessee Tax Friendly?
| Tax Type | Friendly? | Details |
|---|---|---|
| Income Tax | Yes | No tax on earned income |
| Property Tax | Yes | Lower than national average |
| Sales Tax | High | Among the highest in the U.S. |
| Retirement Tax | Yes | No tax on Social Security or retirement income |
| Estate/Inheritance Tax | Yes | None in Tennessee |
7. FAQs About Taxes in Tennessee
Q1: Do I have to pay state income tax if I work remotely in Tennessee?
No. Tennessee does not have a state income tax, so your remote income is not taxed by the state.
Q2: Are Social Security benefits taxed in Tennessee?
No. Social Security benefits are completely tax-exempt at the state level.
Q3: Are there tax breaks for seniors in Tennessee?
Yes. Seniors may qualify for property tax relief or freezes depending on their county of residence and income level.
Q4: Why is the sales tax so high in Tennessee?
Tennessee uses high sales tax to generate revenue instead of taxing personal income. This can benefit higher earners or savers.
Final Thoughts: Should You Move to Tennessee for Taxes?
If you’re a wage earner, retiree, or entrepreneur looking to maximize your income and savings, Tennessee is undeniably one of the most tax-friendly states in the U.S. With no state income tax, low property taxes, and retiree benefits, it’s especially appealing for those leaving higher-tax states.
While the sales tax is high, it’s predictable and controllable based on spending. Overall, Tennessee offers a tax environment that rewards earning and investing, not penalizing it.
