What Is the Tennessee Dividend Tax Rate?
Understand Tennessee's tax landscape for investors following the repeal of the Hall Income Tax, which formerly applied to dividend and interest income.
Tennessee does not have a state tax on dividend income. The state’s tax on investment income, known as the Hall Income Tax, was officially repealed after a multi-year phase-out period. This tax specifically targeted unearned income from dividends and interest. Its elimination makes Tennessee one of the few states with no individual income tax of any kind.
The repeal means residents no longer pay state taxes on dividends from stocks or interest from bonds. The focus is now on federal tax obligations for this income, as the state-level tax was removed for tax years beginning on or after January 1, 2021.
The Hall Income Tax Explained
The Hall Income Tax, enacted in 1929, was a levy on certain investment income earned by Tennessee residents, trusts, and partnerships. It was a tax on unearned income, distinct from a general income tax on wages, which Tennessee has never had. The tax was primarily applied to dividends from corporate stock and interest earned on bonds, and for many years, the tax rate was 6 percent.
A feature of the Hall Income Tax was its exemption structure. An individual taxpayer was entitled to a $1,250 annual exemption, while married couples filing a joint return could exempt $2,500 of their combined interest and dividend income. These exemptions meant that only individuals with investment income exceeding these thresholds were required to file a Hall Income Tax return.
Further exemptions were available for specific groups of taxpayers. Seniors over the age of 65 were exempt from the tax if their total income from all sources did not exceed certain limits. For example, a single person over 65 with a total income of $33,000 or less, or a married couple with a total income of $59,000 or less, would not have to pay the Hall tax.
Repeal and Phase-Out Process
The process to eliminate the Hall Income Tax was a gradual one, set in motion by legislation passed in 2016. The law established a multi-year schedule to phase out the tax, allowing for a predictable reduction in the tax burden on investors.
The phase-out began with the 2016 tax year, when the rate was reduced from 6 percent to 5 percent. The rate continued to decrease by one percentage point each year: 4 percent for 2017, 3 percent for 2018, and 2 percent for 2019.
The final step in the phase-out occurred in the 2020 tax year, when the rate was just 1 percent. As legislated, the Hall Income Tax was fully repealed for all tax years beginning on or after January 1, 2021. From that date forward, Tennessee no longer imposes a state-level tax on interest and dividend income.
Current Tax Landscape for Investment Income in Tennessee
With the repeal of the Hall Income Tax, Tennessee does not impose a state income tax on dividends or interest earned by individuals. This places Tennessee among a small group of states that do not tax individual income in any form. Tennessee residents no longer need to file a state return for this type of investment income.
This repeal only applies at the state level, and all dividend and interest income remains subject to federal income tax. Tennessee residents must continue to report this income on their federal tax returns and pay any applicable federal taxes. The tax rates at the federal level for qualified dividends and long-term capital gains differ from the rates for ordinary income.
Beyond dividends and interest, Tennessee also does not have a general capital gains tax on the sale of stocks, bonds, or real estate. When a Tennessee resident sells an investment for a profit, that gain is not subject to any state-level taxation. However, it must still be reported and taxed at the federal level.