No income tax in Tennessee: what the state takes instead

A Tennessean files Form 1040 and stops. There is no state income tax return, no state withholding on a paycheck, no state estimated payment and no state refund. The Hall income tax, which reached only interest and dividends, was phased down from 5% in 2016 to 1% in 2020 and repealed for 2021, and a 2014 constitutional amendment forbids the legislature from taxing payroll or earned income at all. What Tennessee collects instead is a 7% state sales tax that every county raises to between 9.25% and 9.75%, applied to groceries at a reduced 4% state rate plus the full local rate; a property tax figured by the county assessor on 25% of a home’s value; a franchise and excise tax of 0.25% of net worth and 6.5% of net earnings on every LLC, limited partnership and corporation, with a $100 minimum whether or not the company did anything; and a business tax on gross receipts of $100,000 or more in a county or city. None of them produces a return for a person who works for wages and owns nothing but a house and a car. Two of them, property tax and sales tax, go on the federal Schedule A.

The point of knowing the four is that “no income tax” does not mean “no tax.” A household that spends $40,000 on taxable goods in a 9.25% county pays about $3,500 at the register over a year, which is a respectable income tax collected a few dollars at a time. A new buyer of a $400,000 house pays the county and city a bill in the low thousands every winter. And the owner of a one-member LLC formed on a website for a rental house or a side business owes the Department of Revenue $100 a year and a return, even in a year the company earned nothing. That last one is the Tennessee tax people learn about from a notice.

Nothing to file: what the repeal left behind

Tennessee never had a general income tax. For ninety years it had the Hall tax, a 6% and later 5% levy on certain interest and dividends (verify pre-2016 rate), with an exemption that spared most working households and caught retirees living on a portfolio. The legislature voted in 2016 to phase it out by a point a year, and the Department of Revenue, the Department from here on, confirms the schedule: 5% for 2016, 4% for 2017, 3% for 2018, 2% for 2019, 1% for 2020, and nothing for tax years beginning January 1, 2021. The last Hall returns were filed in the spring of 2021. Since then a Tennessean’s brokerage account, savings interest, mutual fund distributions and stock sales have been federal matters only.

The careful reader will notice the two protections are different. The 2014 amendment to Article II, Section 28 of the state constitution bars a state or local tax on payroll or earned income (verify amendment text). The Hall tax on investment income died by statute, not by amendment. A future legislature could in principle tax interest and dividends again without going back to the voters; it would need a bill, not an amendment. Nobody is proposing one. Social Security was never taxed by Tennessee, even while the Hall tax existed.

No Tennessee city or county levies an income or payroll tax either.

The sales tax: 7% plus the county, and it reaches groceries

The state rate is 7% on most goods and taxable services. Every county, and some cities, add a local option rate of up to 2.75%, and nearly all of them are at or near the top, so the combined rate across the state runs from 9.25% to 9.75%, among the highest in the country. Food and food ingredients are taxed at a 4% state rate instead of 7%, but the full local rate still applies, so groceries carry roughly 6.25% to 6.75% in most counties. Prepared food, restaurant meals, candy, dietary supplements, alcohol and tobacco stay at the full 7% plus local.

There is one exception as of this month. Davidson County, under a 2026 law that lets a metropolitan-government county reduce its local tax on groceries, cut its local rate on food and food ingredients from 2.25% to 1.75% effective November 1, 2026, so Nashville groceries are now taxed at 5.75% combined (Important Notice 26-19). Everything else in Davidson County stays at 9.25%. Bills to repeal the 4% state grocery tax outright failed in the 2026 session; the state rate on food remains 4%.

Big-ticket items have their own arithmetic. The local tax applies only to the first $1,600 of the price of a single article, and the state adds a 2.75% single-article rate on the portion of the price from $1,600.01 to $3,200. Above $3,200 only the 7% state rate runs. On a $35,000 car in a 2.25% county that means 7% on the full price ($2,450), 2.25% on $1,600 ($36), and 2.75% on the next $1,600 ($44), about $2,530 in all, collected by the county clerk when the car is titled (verify local cap mechanics). The annual back-to-school sales tax holiday ran July 31 through August 2, 2026, on clothing and school supplies of $100 or less per item and computers of $1,500 or less; expect the same last weekend of July in 2027 (verify).

For the federal return, the sales tax is the Tennessee substitute for the state income tax deduction. A Tennessean who itemizes elects to deduct state and local general sales tax on Schedule A, using either receipts or the IRS optional tables for the household’s income and size at the 7% state rate plus the local rate, and adds the actual tax paid on a car, boat or other large purchase on top of the table amount. With no state income tax in the SALT line, the deduction is property tax plus sales tax, and the $40,400 cap for 2026 is rarely a concern for a Tennessee household. The more common outcome is that the SALT line is too small to make itemizing pay. The details are in The SALT cap.

Property tax: the county, 25%, and no homestead exemption

There is no state property tax. The county assessor appraises each parcel, residential property is assessed at 25% of its appraised value (commercial and industrial at 40%), and the county commission and the city council each set a rate per $100 of assessed value. A $400,000 house is assessed at $100,000, and at a combined county and city rate of $2.50 per $100 the bill is $2,500. Rates vary widely by county and city, and the rate is reset after each countywide reappraisal so that the reappraisal itself does not raise total collections (verify). Bills go out in the fall and are due at the county trustee by the end of February, delinquent March 1 in most counties; city dates vary (verify).

Tennessee has no homestead exemption and no cap on how fast an appraisal can rise. What it has is two programs for homeowners 65 or older, disabled homeowners and disabled veterans: a state-funded Property Tax Relief credit on the bill, and in the counties and cities that have adopted it, a Property Tax Freeze. Both are income-tested, both are applied for every year through the county trustee, and both are explained in Property tax relief in Tennessee. The property tax is deductible on Schedule A in the year it is paid; a bill paid in December is a 2026 deduction, the same bill paid in February is a 2027 deduction.

The franchise and excise tax: the one that catches LLC owners

This is the Tennessee tax that surprises people, because it looks like a corporate tax and reaches individuals. The Department’s own statement of who owes it is blunt: a corporation, limited partnership, limited liability company or business trust chartered, qualified or registered in Tennessee, or doing business in the state, must register for and pay franchise and excise tax. A single-member LLC owned by one person is a limited liability company. The fact that the IRS ignores it and puts its income on the owner’s Schedule C or Schedule E makes no difference in Tennessee. Sole proprietors and general partnerships, the people who never filed anything with the Secretary of State, are outside the tax. Anyone who did file is inside it from the day the filing was accepted.

The tax has two parts, reported on one return, Form FAE 170, due the 15th day of the fourth month after the entity’s year ends, which is April 15 for a calendar-year company, and filed electronically through the Department’s TNTAP portal.

• Franchise tax is 0.25% of the company’s net worth, meaning total assets less total liabilities from its books, with a minimum of $100. The minimum is owed whether or not the company is active. Since Public Chapter 950 of 2024 the tax is figured on net worth alone; the old alternative measure based on the value of property in Tennessee (Schedule G) was repealed for tax years ending on or after January 1, 2024, and the refund window for prior years closed November 30, 2024.
• Excise tax is 6.5% of net earnings, which start from the company’s federal taxable income with Tennessee adjustments. The 2023 Tennessee Works Tax Act added a $50,000 standard deduction against net earnings (verify wording and effective year), so a small LLC that nets less than $50,000 owes no excise tax and pays only the $100 franchise minimum.

Quarterly estimated payments are required once the combined franchise and excise liability reaches $5,000 in both the prior and the current year, on the 15th day of the fourth, sixth and ninth months and the first month of the next year. An extension of seven months to file is available; it does not extend the time to pay.

Two adjustments matter for 2026. Tennessee does not follow the 2025 federal law’s return to 100% bonus depreciation. Important Notice 25-36 says the excise tax stays on the old phase-down for assets acquired January 1, 2023 or later: 80% for 2023, 60% for 2024, 40% for 2025, 20% for 2026, and nothing from 2027. An LLC that writes off a $50,000 truck in full on its federal return in 2026 adds back $40,000 on Schedule J, Line 3, and recovers it through regular MACRS depreciation in later years. Nonresidential buildings used in production, which the federal law newly allows to be expensed, get no bonus depreciation at all for Tennessee. The second adjustment is historical: a company that claimed the federal Employee Retention Credit does not reduce its wage deduction for Tennessee (Notice 25-37) (verify).

The exits: FONCE and the obligated member election

Two exemptions rescue most family LLCs, and both have to be claimed, every year, on Form FAE 183, Application for Exemption/Annual Exemption Renewal, by the same April 15 date. Filing late does not lose the exemption by itself, but the Department can charge a $200 penalty each time.

The family-owned non-corporate entity exemption, FONCE, covers an LLC or limited partnership that passes two tests. At least 95% of the ownership must be held by relatives, or by trusts or estates for their benefit. And at least 66.67% of the entity’s gross receipts must be passive investment income: rents from residential property of no more than four units at one location, rents from farm property, royalties, dividends, interest, annuities and gains on stocks and securities, or passive income combined with farming. A husband-and-wife LLC that holds a duplex and a brokerage account qualifies. The same LLC holding a strip mall does not, because commercial rent is not on the list. FONCE applicants complete the disclosure page of FAE 183 every year showing all gross receipts from the federal return, so the Department can check the two-thirds test.

The obligated member entity exemption, OME, is for an LLC or partnership whose members have given up limited liability. The members file the election with the Secretary of State, in the articles or an amendment that every member signs, before the first day of the tax year, and attach that filing to FAE 183. The company is then exempt, but its members are personally liable for its debts, which defeats the usual reason for forming an LLC. It suits a family land company with no debts and no tenants. A separate exemption covers an LLC or LP that holds only farm property or a personal residence of its owners, also claimed annually on FAE 183.

The trap closes in two ways. First, registering the LLC starts the clock: a Secretary of State filing in March 2026 means a Form FAE 170 or FAE 183 by April 15, 2027, and the $100 minimum for 2026 if no exemption applies. Second, the clock does not stop until the owner asks. An abandoned LLC keeps owing $100 a year plus penalties until the owner files a final return, obtains a tax clearance from the Department and dissolves the company with the Secretary of State. Several years of unfiled minimums with penalties and interest is a common first encounter with the Department.

The business tax: gross receipts, $100,000, and the $15 license

The business tax is separate from the franchise and excise tax and reaches a different group: everyone who sells goods or services, including sole proprietors, independent contractors and single-member LLCs. It is a gross-receipts tax with two parts, a state business tax and, in cities that have adopted it, a city business tax, and the Department collects both. The threshold is $100,000 of gross receipts in a county or city, raised from $10,000 by the Tennessee Works Tax Act for tax periods ending on or after December 31, 2023 (verify prior threshold). Below that, a business with more than $3,000 but less than $100,000 of receipts must hold a minimal activity license, bought each year for $15 from the county clerk and, inside a city that has the tax, from the city clerk as well (verify per-jurisdiction rule). Under $3,000 the license is optional.

Above $100,000 the business registers with the Department, files an annual business tax return on TNTAP by the 15th day of the fourth month after its year ends, and pays a rate that depends on its classification: 0.1% of receipts for most retailers, 0.1875% for Class 3 retailers, 0.15% for Class 2, 0.1% for the service businesses in Class 4, and fractions of a tenth of a percent for wholesalers, with a $22 minimum. A consultant grossing $150,000 in Nashville owes about $150 to the state and, if inside the city limits, a similar amount to the city. The business tax is deductible on the federal Schedule C as a tax on the business.

Anyone who sells taxable goods directly to Tennessee customers, including online, also registers for sales tax and files returns monthly, quarterly or annually, due the 20th of the month after the period.

What is not taxed when wealth moves

Tennessee has no estate tax. The inheritance tax was repealed for deaths in 2016 and after, and the gift tax was repealed effective January 1, 2012. An inherited IRA, an inherited brokerage account and the gain on an inherited house are federal matters only. The one Tennessee tax that follows family wealth is the franchise and excise tax on a family LLC, which is why the FONCE exemption exists. Gifts made before 2012 and deaths before 2016 can still carry a Tennessee filing, which comes up when an old estate is finally settled.