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Tennessee Retirement Tax Friendliness

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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 high.

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is toward retirees.
Social Security income is taxed.
Withdrawals from retirement accounts are taxed.
Wages are taxed at normal rates, and your marginal state tax rate is %.
  • 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.

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Tennessee Retirement Taxes

Photo credit: ©iStock.com/omersukrugoksu

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.

Is Tennessee tax-friendly for retirees?

Yes. 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 0.75%.

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 9.46%.

Is Social Security taxable in Tennessee?

No. Tennessee does not tax Social Security benefits in any way.

Are other forms of retirement income taxable in Tennessee?

No. The only forms of taxable income in Tennessee are interest and dividend income. This does not include interest or dividends earned by retirement accounts such as 401(k) or IRA. The state does not tax retirement account income. 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 0.75%, 11th lowest in the country. Most Tennessee homeowners pay less than $1,100 annually in property taxes. Overall, housing costs in Tennessee are 5% lower than the national average.

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 $29,180. 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. Eligible homeowners will receive an exemption of $27,000 on their home value. So, if your total home value is $100,000, your taxes will only apply to $73,000 of that amount.

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How high are sales taxes in Tennessee?

Tennessee has the second highest sales tax in the United States. 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 9.46%.

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%. Despite that tax, however, the total cost of groceries in Tennessee is 7% below the national average.

What other Tennessee taxes should I be concerned about?

As mentioned above, Tennessee also taxes interest and dividend income. The tax rate is a flat 4% for all taxpayers. The first $1,250 is exempt for single filers, and the first $2,500 is exempt for joint filers. Seniors age 65 and older are entirely exempt from this tax if their total annual income is $37,000 or less ($68,000 or less for joint filers).

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.

Rank City Income Tax Paid Property Tax Rate Sales Tax Paid Fuel Tax Paid Social Security Taxed?

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