Tennessee Tax Overview for Individuals

Tennessee Property Taxes

Tennessee does not have a homestead exemption.  However, there is a property tax relief program for the elderly, disabled and veterans.

The assessed valuation of a property is based on 25% of its fair market value.  Depending on the location of the residence, homeowners will be assessed property taxes from the city only, the city and county, or the city, county, and a special school/fire district rate.

Tennessee Sales Tax

Tennessee’s sales tax rate is one of highest in the nation.  The state rate is 7% on tangible property (prescription drugs are exempt) and 6% on food and food ingredients.  Counties and cities may add another 1.5% to 2.75% to the total of either rate.

Many Tennessee residents benefited from the federal tax law which allowed an itemized deduction for the higher of the sales tax or state and local income tax paid.  It remains uncertain as of this writing whether the sales tax deduction will be extended to years 2010 and beyond.

Tennessee’s Version of the Personal Income Tax

While Tennessee does not have an actual personal income tax, as that term is commonly understood, it does have a tax on income derived as dividends from stock and interest on bonds.  The tax applies to persons, partnerships, associations, trusts and corporations in the state.  Although the value of the stocks and bonds is not taxed, any income that is derived from those items is subject to tax.

Dividends: The tax is only on income from dividends and not on gains realized by stockholders on the sale or transfer of their stock, including distributions in liquidation.  Dividends from mutual funds, including capital gains dividends, are fully taxable, regardless of whether those dividends are taken in the form of cash or additional stock.  There is an exception in the law that excludes REIT dividends from taxation.

Interest: Interest received on corporate bonds and non-Tennessee tax-exempt bonds is subject to the Hall Income Tax.  Also interest on most loans made by the taxpayer to another party (e.g., a second mortgage taken on the sale of a home) is subject to tax.  Interest on bank accounts and similar deposits is not taxable.

Tax Rate and Exemptions: The tax rate is 6%.  The exemption is $1,250 for single persons and married couples filing separately and $2,500 for married couples filing jointly.

Tennessee’s Gift Tax

Tennessee imposes a tax on gifts.  There are two rate structures depending on the donor’s relationship to the donee.

Class A donee: Husband, wife, son, daughter, lineal ancestor, lineal descendant, brother, sister, stepchild, son-in-law, and daughter-in-law.  If a person has no child or grandchild, a niece or nephew of such person is a donee in this class.

Class B donee: Any relative, person, association or corporation not specifically designated in Class A.

Exemptions Per Donee: The exemption for Class A donees is $13,000.  The exemption for Class B donees is $3,000.

Tax Rate: The tax rate is graduated from 5.5% to 16%.

Note: Tennessee does not follow the federal lifetime gift tax exemption approach.  This is a significant departure from the federal law and makes planning with large gifts a more complicated and expensive proposition.

Tennessee’s Estate Tax

What is referred to as an “estate tax” in Tennessee is the amount equal to the difference between the Tennessee “inheritance tax” and the “state death tax credit” allowed on the federal estate tax return, IRS Form 706.  But since the federal “state death tax credit” was repealed for the years 2005 – 2010, there is currently no “estate tax” collected in Tennessee, just a state “inheritance tax”.  Tennessee imposes this tax on the net value of a resident decedent’s estate or Tennessee real or personal property owned by a nonresident.

Exemption: The exemption is $1,000,000.

Tax Rate: The tax rate is graduated from 5.5% to 9.5%.

Mark Fly, CPA
Price CPAs, PLLC
3825 Bedford Avenue, Suite 202
Nashville, TN 37215

Phone: 615.577.9686
Fax:     615.463.0586

Disclaimer:  This information does not constitute legal, tax or accounting advice, and should not be relied upon for any planning purposes.  It is provided solely and exclusively for general, non-specific educational purposes, and to advise the reader of the nature of the subject matter.