Tennessee no longer taxes personal income at all, which is straightforward and routinely over-read.
The absence of a personal income tax is not the absence of business taxation. There are separate business taxes reaching entities including limited liability companies, alongside registration and annual filing requirements, and the sales tax position is among the heavier ones.
This covers what changed and when, what still applies to individuals and to businesses, how the sales tax position affects what you sell, and what it means for retirees.
Tennessee: Fully No State Income Tax Since 2022
Tennessee eliminated its Hall Income Tax (which taxed interest and dividend income) effective January 1, 2022. Tennessee now has absolutely no state income tax of any kind on individuals. Wages, salaries, self-employment income, capital gains, interest, dividends, and retirement income are all free from Tennessee state income tax.
The absence of a personal income tax does not mean the absence of business taxation, and that is the most common misunderstanding about this state. An owner who assumes the entity sits outside the system because their own salary is untaxed finds out otherwise at the first filing.
Anu Gupta, CA, EA, B.Tech · LinkedInHistory: The Hall Income Tax
Tennessee's Hall Income Tax, enacted in 1929, taxed only investment income (interest and dividends) at 6% at its peak, reduced over several years until elimination:
| Year | Hall Income Tax Rate |
|---|---|
| 2016 and before | 6% |
| 2017 | 5% |
| 2018 | 4% |
| 2019 | 2% |
| 2020 | 1% |
| 2021 (final year) | 1% |
| 2022 onward | 0%, fully eliminated |
Federal Income Tax Still Applies
Tennessee residents pay federal income tax at the same rates as all Americans. No state-level income tax does not reduce federal obligations.
Tennessee Business Taxes
Franchise and Excise Tax (F&E Tax)
Tennessee imposes two business taxes on entities doing business in the state:
- Excise Tax: 6.5% on Tennessee net earnings (similar to a corporate income tax)
- Franchise Tax: 0.25% of the greater of net worth or real and tangible property in Tennessee (minimum $100)
- Applies to: LLCs, corporations, S-corps, partnerships (F&E generally applies to pass-through entities too, unlike most states)
Pro Tip: Tennessee is unusual in that its franchise/excise tax applies to most business entities including LLCs and partnerships, not just corporations. Don't assume pass-through entity owners have no Tennessee business tax obligation.
Tennessee Sales Tax: Among the Highest in the US
Tennessee makes up for the lack of income tax with high sales taxes:
- State sales tax: 7% (one of the highest state rates in the US)
- Local sales taxes add up to 2.75%, bringing total to up to 9.75%
- Food (grocery): taxed at reduced rate of 4% state + local
- Restaurant meals: taxed at full rate
Tennessee Estate and Inheritance Tax
Tennessee repealed its state estate tax in 2016. There is no state estate tax or inheritance tax in Tennessee. Federal estate tax applies to estates above the federal exemption.
Tennessee for Retirees
Tennessee is one of the most tax-friendly states for retirees:
- No state income tax on any income (Social Security, pension, IRA, 401(k), capital gains)
- No estate tax
- Property taxes relatively low compared to national average
- Only downside: high sales tax affects daily spending
Property Tax in Tennessee
Tennessee property taxes are assessed at 25% of appraised value for most residential property. Effective property tax rates are generally below the national average.
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Frequently Asked Questions
Did Tennessee always have no income tax?
No. Until 2021, Tennessee taxed interest and dividend income under the Hall Income Tax. Wages were never taxed at the state level.
Do Tennessee LLCs pay state taxes?
Yes, through the Franchise and Excise Tax, which applies to most business entities. This is different from an income tax but still a significant business tax obligation.
Is Tennessee better than Florida for taxes?
Both have no state income tax. Tennessee's business franchise/excise tax applies broadly. Florida has no such tax on pass-through entities. Tennessee's sales tax is higher. Both have no estate tax.
Do businesses here really pay no state tax?
No, and this is the most common misunderstanding about the state. The absence of a personal income tax does not mean the absence of business taxation: there are separate business taxes that apply to entities including limited liability companies, alongside registration and annual filing requirements. An owner who assumes the entity is outside the system because their salary is untaxed will discover otherwise at the first filing.
What should be checked on the sales tax side?
Whether what you sell is taxable, because the treatment of services and of digital products varies and is not intuitive. Combined state and local rates here are high, so the cost of getting the answer wrong is proportionately larger, in both directions: failing to collect leaves you funding it, and over-collecting creates its own problem. Confirm the treatment of your specific product with the state department.
Written by
Anu Gupta, CA, EA, B.Tech
Anu works with US businesses on tax and entity questions at Profitjets, from choosing a structure to the filings that follow it. She writes about the decisions owners make once and then live with for years. Connect on LinkedIn
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