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    Tennessee Tax Guide 2026

    TaxKiln Editorial · Last reviewed:

    Tennessee has no personal income tax — the Hall Income Tax on interest and dividends was fully phased out effective January 1, 2021 (Tenn. Code §67-2-101 repealed). State sales tax is 7.0% with local add-ons of 1.5%–2.75%, producing a combined average around 9.55% — the highest combined sales tax in the United States. Businesses pay both the Franchise Tax (0.25% of net worth, $100 minimum) and Excise Tax (6.5% of net earnings). Property tax averages ~0.66% effective. No estate or inheritance tax.

    No income tax — Hall Income Tax phase-out completed

    Tennessee historically taxed interest and dividends (but not wages) under the Hall Income Tax (Tenn. Code §67-2-101). The 2016 legislature enacted a phase-out, reducing the rate by 1 percentage point per year from 5% in 2017 to 0% effective 2021. Statutes were formally repealed effective tax year 2021. As of tax year 2026, Tennessee taxes NO form of personal income — wages, interest, dividends, capital gains, rental income, business pass-through all untaxed at the personal level. State revenue funded heavily by sales tax (highest combined rate in the US) and Franchise/Excise on business. No individual income tax return required to be filed; no withholding obligations on Tennessee wages.

    Sales tax — the highest combined rate in America

    State sales tax 7.0%. Local jurisdictions add 1.5%–2.75% (Memphis 2.75%, Nashville 2.25%, Knoxville 2.25%, Chattanooga 2.25%). Combined averages 9.55% statewide per Tax Foundation data — narrowly higher than Louisiana. Grocery exception: Tenn. Code §67-6-228 reduces the state rate on food and food ingredients to 4% (local rates still apply, so combined typically 6.5%–6.75% on groceries vs ~9.55% on other retail). 2023 saw a 3-month total grocery sales-tax holiday (Aug-Oct 2023) — not repeated in 2024 or 2025. Clothing, prescription drugs, professional services largely follow national norms. Single-article cap: state portion charged on first $1,600 of single article; local portion on first $1,600. Economic nexus (post-Wayfair, Tenn. Code §67-6-501(b)): $100,000 of TN sales in prior 12 months (no transaction count). Marketplace facilitator law: Tenn. Code §67-6-509.

    Franchise & Excise Tax (F&E) — the business levy

    Most TN businesses (corporations, LLCs, LPs, REITs) pay both the Franchise Tax AND the Excise Tax — collectively the 'F&E Tax.' Sole proprietors (Schedule C) and general partnerships are exempt. Franchise Tax (Tenn. Code §67-4-2107): 0.25% of the greater of (a) net worth apportioned to TN, or (b) the actual value of real and tangible personal property in TN. Minimum $100. SB 2103 of 2024 repealed the alternative property-base computation effective 2026 — now only net worth. Excise Tax (Tenn. Code §67-4-2007): 6.5% of net earnings apportioned to TN. Equivalent to state corporate income tax. Single-sales-factor apportionment as of 2017. For a single-member LLC consulting business doing $200k revenue / $130k profit in TN: $100 Franchise + $130k × 6.5% Excise = $8,450 — but wait: single-member LLCs of an INDIVIDUAL OWNER are disregarded for F&E purposes IF certain conditions met (the 'SMLLC exemption' under Tenn. Code §67-4-2008(a)(11)). Most solo consultants escape F&E by maintaining single-member LLC status with no S-election.

    Property tax

    Statewide effective average ~0.66% — below national average. Shelby County (Memphis) ~1.12%, Davidson (Nashville) ~0.65%, Knox (Knoxville) ~0.75%, Hamilton (Chattanooga) ~0.78%, Williamson (Brentwood/Franklin) ~0.56%. Residential property assessed at 25% of appraised value; commercial at 40%; industrial at 30%. Local tax rates set per $100 of assessed value (so a $400,000 Nashville home has assessed value $100k → at a $3.20 rate = $3,200 annual tax). Elderly Property Tax Freeze (Tenn. Code §67-5-705): freezes tax bill for low-income 65+ owner-occupants. Income limit varies by county (~$36k–$46k for 2025). Disabled veteran homestead exemption: up to $175,000 of full appraised value.

    Estate, inheritance, and gift tax

    Tennessee fully repealed its inheritance tax effective for deaths on or after January 1, 2016 (Public Chapter 1057 of 2012, phased reduction completed). No estate tax. No gift tax (gift tax was repealed earlier, in 2012). A TN resident dying in 2026 owes only federal estate tax (after the $13.99M / $15M permanent OBBBA exemption). No TN-level filing requirement on death.

    Self-employed and relocation considerations

    For W-2 high earners and pass-through partners relocating from CA, NY, NJ, or IL, Tennessee is one of the most tax-efficient destinations. Combine no personal income tax + no estate tax + moderate property tax + low cost of living, with the trade-off of high combined sales tax (9.55%). Nashville specifically attracts tech workers and entertainment industry transplants; the Williamson County suburbs (Brentwood, Franklin) have become high-income enclaves with strong public schools. F&E trap for transplants: setting up an S-corp in TN creates F&E obligations (6.5% excise on net earnings). Many TN consultants instead operate as single-member disregarded LLCs to maintain the F&E exemption. Residency-establishment markers: TN driver's license, voter registration, vehicle registration, primary home in TN, day-count predominantly in TN. Departing CA/NY residents face residency audits — clean break essential.

    Worked example: Kendrick Walker, Nashville recording engineer / sole proprietor (single, 2026)

    Kendrick relocated from Los Angeles in 2024. 2026 self-employment net income $185,000 (Schedule C). Owns a $625,000 East Nashville home (purchased 2024).

    Federal: SE tax + ordinary federal — standard treatment. Tennessee personal income tax: $0. F&E Tax: Kendrick is a sole proprietor (Schedule C, no LLC) — fully exempt from Franchise & Excise. $0. (If Kendrick had elected to be an S-corp: he'd pay 6.5% TN excise on net earnings — meaningful enough that most TN solo professionals stay as Schedule C or disregarded SMLLC.) Property tax (Davidson County): Appraised value $625,000 → assessed at 25% = $156,250 Davidson tax rate: $3.254 per $100 assessed (2025) Annual property tax: $156,250 × 0.03254 = ~$5,084 Sales tax exposure (rough estimate on $50k annual taxable spending at 9.25% Nashville rate): $4,625. Total TN tax burden: ~$9,700 annually. California equivalent (his prior burden): $185k SE income → ~$15,000 CA personal income tax (top of 9.3% bracket) Plus 1031 Exchange CA-specific complexity, SDI 1.2% on $185k = $2,220, etc. Total CA: ~$17,500+ plus higher property tax in equivalent CA market Net TN savings: ~$8,000+/year, before considering capital-gains-event scenarios.

    Statute references

    • Hall Income Tax repealed — Tenn. Code §67-2-101 (repealed effective 2021)
    • Franchise Tax — Tenn. Code §67-4-2107
    • Excise Tax — Tenn. Code §67-4-2007
    • F&E exemption for SMLLCs — Tenn. Code §67-4-2008(a)(11)
    • Sales tax economic nexus — Tenn. Code §67-6-501(b)
    • Grocery reduced sales tax — Tenn. Code §67-6-228
    • Inheritance tax repealed — Tenn. Pub. Ch. 1057 (2012), effective 2016

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