What Percentage of Taxes Are Taken Out in Tennessee?

Tennessee employs a distinct tax structure that differentiates it from many other states. Understanding this framework is valuable for residents and visitors to comprehend their financial obligations within the state.

Income Tax in Tennessee

Tennessee does not impose a state income tax on wages and salaries earned by its residents. This absence of a broad individual income tax on earned income is a significant characteristic of the state’s tax system. For many years, Tennessee did levy a tax on income from interest and dividends, known as the Hall income tax (Tenn. Code Ann. § 67-2-101).

This specific tax, which applied to certain investment income, was gradually phased out. The Hall income tax was fully repealed as of January 1, 2021. This means Tennessee now has no state income tax on any form of individual income, including wages, salaries, pensions, retirement distributions, and investment earnings.

Sales Tax Rates

Sales tax constitutes a substantial portion of Tennessee’s state revenue. The state levies a general sales tax rate of 7% on most goods and services. This state rate is supplemented by local sales taxes imposed by counties and municipalities.

Local sales tax rates can vary, typically ranging from 2.00% to 2.75%, which are added to the state rate. Consequently, the combined state and local sales tax rate can differ considerably across various locations within Tennessee, often ranging from 8.5% to 9.75%. The average combined sales tax rate in the state is approximately 9.55% to 9.56%. Certain items, such as most groceries, are taxed at a reduced state rate of 4%, although prepared foods, candy, and alcoholic beverages are subject to the full 7% state rate plus local taxes.

Property Tax Assessments

Property taxes in Tennessee are administered at the local level by county and municipal governments, not by the state. The process begins with an appraisal of a property’s fair market value by the county assessor. Once the appraised value is determined, an assessment ratio is applied based on the property’s classification.

Residential and farm properties are assessed at 25% of their appraised value. Commercial and industrial properties, by contrast, are assessed at 40% of their appraised value. The resulting assessed value is then multiplied by the local tax rate, which is set by the county commission or city council, to determine the property tax bill. Property tax rates vary widely depending on the specific county and municipality, reflecting local budgeting needs and services provided.

Other General Consumer Taxes

Beyond income, sales, and property taxes, consumers in Tennessee encounter various other taxes and fees embedded in the cost of certain goods and services. Excise taxes are applied to specific products, typically included in the final purchase price. For instance, gasoline is subject to a state excise tax of 27.4 cents per gallon.

Tobacco products also carry an excise tax, with cigarettes taxed at $0.62 per pack. Alcoholic beverages are another category subject to excise taxes, including beer at $1.29 per gallon, liquor at $4.40 per gallon, and wine at $1.21 per gallon.

Vehicle owners incur fees for registration and titling, governed by Tenn. Code Ann. § 55-4-101. A standard state registration fee for passenger vehicles is approximately $29, though this can be supplemented by county-specific wheel taxes that vary by location. Titling a vehicle typically costs around $13, with an additional $11 fee for noting a lien on the certificate of title. Tennessee does not impose a state-level inheritance tax or estate tax. The state’s inheritance tax was repealed for decedents with dates of death after December 31, 2015.