Overview of Tennessee Retirement Tax Friendliness
Tennessee does not have a standard income tax. Social Security retirement benefits and income from retirement accounts are not taxed at the state level. Property taxes in Tennessee are quite low, but sales taxes are very high.
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Annual Income from Private Pension
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- Our Tax Expert
Jennifer Mansfield, CPA Tax
Jennifer Mansfield, CPA, JD/LLM-Tax, is a Certified Public Accountant with more than 30 years of experience providing tax advice. SmartAsset’s tax expert has a degree in Accounting and Business/Management from the University of Wyoming, as well as both a Masters in Tax Laws and a Juris Doctorate from Georgetown University Law Center. Jennifer has mostly worked in public accounting firms, including Ernst & Young and Deloitte. She is passionate about helping provide people and businesses with valuable accounting and tax advice to allow them to prosper financially. Jennifer lives in Arizona and was recently named to the Greater Tucson Leadership Program.
Tennessee Retirement Taxes
Tennessee combines the lowest cost of living in the country with a warm climate and terrific recreational offerings. Cultural hotspots like Nashville and Memphis are great retirement destinations for seniors who love the arts. The Blue Ridge Mountain region in western Tennessee is perfect for outdoor enthusiasts.
The state’s retirement taxes are another reason seniors in Tennessee are smiling. The Volunteer State’s income tax only applies to interest and dividends, which means it does not tax any form of retirement income. For those who plan to work part-time in retirement, work income is also state tax-free in Tennessee.
That can add up to hundreds, or even thousands, of dollars in retirement tax savings as compared with many other states. Tennessee also has low property taxes, although its sales tax is one of the highest in the U.S.
A financial advisor in Tennessee can help you plan for retirement and other financial goals. Financial advisors can also help with investing and financial plans, including taxes, homeownership, insurance and estate planning, to make sure you are preparing for the future.
Is Tennessee tax-friendly for retirees?
As Tennessee does not have a standard income tax, all forms of retirement income are untaxed at the state level. This includes Social Security and income from retirement accounts. Additionally, property taxes in Tennessee are quite low, with an average effective rate of just 0.64%.
That being said, one tax that hits seniors in Tennessee especially hard is the sales tax. Tennessee has the highest state and local sales taxes of any state, with an average overall rate of 9.55%.
Is Social Security taxable in Tennessee?
Tennessee does not tax Social Security benefits in any way.
Are other forms of retirement income taxable in Tennessee?
The only forms of taxable income in Tennessee are interest and dividend income, and this law is being phased out in 2021 and beyond. However, regardless of this tax, it does not cover interest or dividends earned by retirement accounts, such as a 401(k) or an IRA. The state does not tax retirement account income at all. Likewise, pension income, whether a government pension or private pension, is not taxable.
How high are property taxes in Tennessee?
Tennessee’s property taxes and property tax rates are quite low. The average effective property tax rate is 0.64%, 15th-lowest in the country. Most Tennessee homeowners pay around $1,200 annually in property taxes.
What is the Tennessee Property Tax Relief Program?
The state of Tennessee provides property tax relief to some elderly or disabled homeowners. To qualify, the applicant’s total household income (including spousal income) can be no greater than $30,700. This includes Social Security benefits and other retirement income.
Senior applicants must be at least 65 years old, while disabled homeowners must be fully disabled according to the Social Security Administration (SSA). Eligible homeowners will receive an exemption of $29,000 on their home value. So, if your total home value is $100,000, your taxes will only apply to $71,000 of that amount.
How high are sales taxes in Tennessee?
Tennessee has the second-highest state sales tax in the U.S. The state rate is 7% and that is supplemented by local rates that can be as high as 2.75%. On average, the total rate paid by Tennessee residents is 9.55%.
While prescription drugs are fully exempted in Tennessee, groceries are not. Tennessee charges a lower tax rate for groceries, but it is still one of just a handful of states that taxes grocery purchases. The sales tax rate for groceries is 4%.
What other Tennessee taxes should I be concerned about?
As mentioned above, Tennessee also taxes interest and dividend income. For the 2020 tax year, the tax rate is a flat 1% for all taxpayers. However, the tax is officially repealed as of Jan. 1, 2021, which means your 2020 taxes will be the last time you pay it.
Tennessee has no inheritance tax, and its estate tax expired in 2016.
Most Tax Friendly Places for Retirees
SmartAsset’s interactive map highlights the places in the country with tax policies that are most favorable to retirees. Zoom between states and the national map to see the most tax-friendly places in each area of the country.
Methodology To find the most tax friendly places for retirees, our study analyzed how the tax policies of each city would impact a theoretical retiree with an annual income of $50,000. Our analysis assumes a retiree receiving $15,000 from Social Security benefits, $10,000 from a private pension, $10,000 in wages and $15,000 from a retirement savings account like a 401(k) or IRA.
To calculate the expected income tax this person would pay in each location, we applied the relevant deductions and exemptions. This included the standard deduction, personal exemption and deductions for each specific type of retirement income. We then calculated how much this person would pay in income tax at federal, state, county and local levels.
We calculated the effective property tax rate by dividing median property tax paid by median home value for each city.
In order to determine sales tax burden we estimated that 35% of take-home (after-tax) pay is spent on taxable goods. We multiplied the average sales tax rate for a city by the household income after subtracting income tax. This product is then multiplied by 35% to estimate the sales tax paid.
For fuel taxes, we first distributed statewide vehicle miles traveled to the city level using the number of vehicles in each county. We then calculated miles driven per capita in each city. Using the nationwide average fuel economy, we calculated the average gallons of gas used per capita in each city and multiplied that by the fuel tax.
For each city we determined whether or not Social Security income was taxable.
Finally, we created an overall index weighted to best capture the taxes that most affect retirees. The income tax category made up 40% of the index, property taxes accounted for 30%, sales taxes 20% and fuel taxes 10%.
Sources: Internal Revenue Service, Social Security Administration, state websites, local government websites, US Census Bureau 2018 American Community Survey, Avalara, American Petroleum Institute, GasBuddy, UMTRI, Federal Highway Administration