Tennessee residents enjoy one of the lightest tax burdens in the country, according to the Milwaukee-Wisconsin Journal Sentinel. The state, however, does have one of the highest sales tax rates in the country. Tennessee is also one of only eight states that impose an inheritance tax on the beneficiaries of a will. But if your concern is protecting your income from taxation, Tennessee is a good place to live.
Although Tennessee does not exempt all income from taxation, the state doesn’t tax your earned income. The average worker does not pay a dime in income tax on his wages. The state also exempts retirement benefits from taxation, including military, Social Security and pension income. It levies a 6 percent income tax, but only on interest and dividend income over $1,250 for individuals and $2,500 if you’re married and filing a joint return.
Tennessee’s property tax rates fall into a gray area. In some respects, they are advantageous and in others they are not. The state doesn’t allow you to exempt any of your home’s value from property tax, so you must pay based on its full fair market price. However, you only have to pay 25 percent of that price, which is less than in some other states. If you’re older than age 65 and have limited income, Tennessee offers special programs to help defray your property tax costs.
Tax Breaks for Businesses
If you own a business or are planning to begin one in Tennessee, the state offers two notable tax credits. Substantial companies willing to spend $500,000 on the hiring of at least 25 new employees receive a credit off their tax bill of at least $50,000, or $2,000 for each employee. If your company invests $1 million in equipment, you can receive a $10,000 credit against any excise taxes you incur during your business year. However, these tax advantages don’t help small businesses.
Although Tennessee is one of only a handful of states that impose an inheritance tax, the law is somewhat taxpayer-friendly. The state offers a $1 million exemption, so unless you inherit a great deal of money, this tax law would not apply to you. The levy falls between 5.5 percent and 9.5 percent of any value over $1 million, depending on the value of your inheritance. The lower the value, the less of a percentage you will pay. If someone names you as the sole beneficiary of his $1.3 million estate, you’d pay $22,500 in inheritance tax, or 7.5 percent of the $300,000 value over $1 million. If someone leaves you his $500,000 home, however, it’s tax-free.
- Retirement Living Information Center: Taxes By State; January 2011
- Kiplinger; Retiree Tax Guide to Tennessee; June 2011
- Tennessee Department of Revenue: Inheritance Tax
- Sullivan Partnership Networks: Tennessee Incentives
- “Milwaukee-Wisconsin Journal Sentinel”; The Tax Tale: 50-State Comparison; Dave Umhoefer; April 2010
Beverly Bird has been writing professionally for over 30 years. She is also a paralegal, specializing in areas of personal finance, bankruptcy and estate law. She writes as the tax expert for The Balance.