What’s Actually Tax Free in Tennessee?

Tennessee presents a distinctive tax environment compared to many other states. Understanding which areas are exempt from state-level taxation is important. This article outlines the specific categories of income, goods, services, and property that are considered tax-free within the state.

Income Exempt from State Taxation

Tennessee does not impose a state income tax on wages, salaries, or other earned income. This absence of a broad state income tax on personal earnings distinguishes Tennessee from most other U.S. states. Residents’ paychecks are therefore not subject to a state-level deduction for income tax purposes.

Historically, Tennessee did levy a tax, known as the “Hall Tax,” on income derived from interest and dividends. This tax, which applied to certain investment income, was eliminated as of January 1, 2021. With its repeal, interest and dividend income are now entirely exempt from state-level taxation in Tennessee. It is important to note that while these income streams are free from state taxation, federal income taxes still apply to earned income, interest, and dividends.

Goods and Services Exempt from Sales Tax

Certain goods and services in Tennessee are exempt from the state’s sales tax. Prescription drugs and medicines, as well as certain medical equipment and devices, are generally not subject to sales tax. This includes items dispensed by a licensed pharmacist for human use, such as insulin and medical oxygen.

While most groceries (defined as food and food ingredients) are subject to a reduced state sales tax rate, rather than being fully exempt, they are not subject to the full general sales tax rate. Prepared food, candy, alcoholic beverages, and dietary supplements remain subject to the standard sales tax rates. Tennessee also observes annual sales tax holidays. For instance, the annual back-to-school sales tax holiday allows for tax-exempt purchases of clothing and school supplies priced at $100 or less per item. Computers and tablets priced at $1,500 or less also qualify for exemption during this period.

Property Exempt from Property Tax

Tennessee law provides for certain categories of real and personal property to be exempt from property taxes. Property owned by governmental entities, such as federal, state, or local government bodies, is generally exempt from taxation. This exemption applies to property used for public purposes, ensuring that government functions are not burdened by property tax obligations.

Religious, charitable, scientific, and non-profit educational institutions may also qualify for property tax exemption. To obtain this status, the property must be owned by and used purely and exclusively for the exempt purposes for which the institution was created. For example, a church building used for worship services or a university campus used for educational activities could qualify for exemption. These organizations must apply to the Tennessee State Board of Equalization to determine eligibility and obtain exempt status for each parcel of property.

In addition to these direct exemptions, Tennessee offers a property tax relief program for qualifying elderly, disabled, and disabled veteran homeowners. This program provides state funds to reimburse eligible taxpayers for a portion or all of their paid property taxes, effectively reducing their tax burden. Eligibility for elderly and disabled homeowners often includes income limitations, while disabled veterans must meet specific service-connected disability criteria. It is important to note that this is a relief program, meaning taxpayers still receive a tax bill and are responsible for payment, with the state providing reimbursement.

Absence of State Wealth Transfer Taxes

Tennessee does not impose state-level taxes on the transfer of wealth through inheritance, estates, or gifts. This means that beneficiaries receiving assets from a deceased person’s estate are not subject to a state inheritance tax. The state’s inheritance tax was fully repealed as of January 1, 2016, simplifying the transfer of assets to heirs.

Similarly, Tennessee does not have a state estate tax, which is a tax levied on the total value of a deceased person’s assets before distribution to heirs. This absence means that estates in Tennessee are not subject to a state-level assessment based on their overall value. Furthermore, Tennessee also repealed its state gift tax effective January 1, 2012. Consequently, individuals making gifts during their lifetime are not subject to a state tax on those transfers. While Tennessee residents are exempt from these state-level wealth transfer taxes, it is important to remember that federal estate and gift taxes may still apply depending on the value of the assets transferred.