Overview
Tennessee does not levy a state income tax on wages, salaries, or earned income of any kind. The state previously taxed interest and dividend income through the Hall Income Tax at a rate of 1% (after being reduced from 6% over several years), but this tax was fully repealed effective January 1, 2021. As of 2026, Tennessee is a complete no-income-tax state — no wages, no investment income, no capital gains, and no retirement income face state taxation.
While Tennessee residents enjoy zero income tax, the state has one of the highest sales tax burdens in the country. Tennessee's state sales tax rate is 7.00%, and with local add-ons the average combined rate is approximately 9.55%. This makes it one of the top three highest sales tax states nationally. Groceries are taxed at a reduced state rate of 4.00% (plus local taxes), which still adds a noticeable cost to food budgets compared to states that exempt groceries entirely.
Tennessee Tax Characteristics
Tennessee has no state income tax
Your entire salary is exempt from state income tax withholding. Only federal income tax and FICA (Social Security and Medicare) are deducted from your paycheck.
| Tax Type | Rate |
|---|---|
| Average Property Tax Rate | 0.66% |
| Average Combined Sales Tax Rate | 9.55% |
| Cost of Living Index | 93.3 (US avg = 100) |
Understanding Tennessee Taxes
Property taxes in Tennessee are notably low. The average effective property tax rate is approximately 0.66%, well below the national average. Tennessee uses a classification system for property assessment: residential property is assessed at 25% of appraised value, while commercial and industrial property is assessed at 40%. This classification results in lower effective tax rates for homeowners compared to business properties.
Tennessee's cost-of-living index is approximately 93, about 7% below the national average. Nashville has seen significant cost increases as the city grew into a major tech and healthcare hub, but it remains more affordable than comparable cities like Austin or Denver. Memphis, Knoxville, and Chattanooga offer even more affordable options with growing job markets.
For retirees, Tennessee is exceptionally attractive. No tax on Social Security, pensions, 401(k) withdrawals, or IRA distributions, combined with low property taxes and below-average cost of living, makes it one of the top retirement destinations in the Southeast. The state also has no estate tax or inheritance tax.
Tennessee levies a franchise and excise tax on businesses (6.5% excise on net earnings, 0.25% franchise on net worth), but this does not directly affect W-2 employees. Self-employed individuals operating as sole proprietors are generally not subject to the excise tax, though those organized as LLCs or corporations may be.
Filing Tips for Tennessee
Be prepared for high sales tax on purchases — at nearly 9.55% combined, large purchases like appliances or vehicles carry a significant tax cost
Groceries are taxed at a reduced rate (4% state) but still add up — factor this into your food budget
Nashville's cost of living is rising faster than the state average; consider Knoxville or Chattanooga for more affordable urban living
State Revenue Authority
For the most current tax information, visit the official Tennessee tax authority:
tn.gov/revenueRelated Calculators
Frequently Asked Questions
For educational purposes only -- not financial or tax advice. Tax rates shown are based on 2026 data and may not reflect recent changes. Consult a tax professional for your specific situation.