The 4 Taxes You Won’t Pay if You Retire in Tennessee

No taxes on income or retirement distributions deliver a big advantage to retirees in Tennessee

By Dave Hall, CPA/PFS

For retirees, the state you call home can have a significant impact on your retirement nest egg due to variations in tax policies. Tennessee is increasingly becoming a top choice for retirees, not just for its scenic beauty and vibrant culture but also for its highly favorable tax environment and affordable housing.

No State Income Tax on Wages and Retirement Income

One of the most attractive aspects of retiring in Tennessee is the absence of a state income tax on wages and retirement income. Tennessee does not tax Social Security benefits, pensions, 401(k) withdrawals, or IRA distributions. This can result in substantial savings compared to states that impose taxes on these income streams.

For retirees living on a fixed income, this lack of taxation means your money goes further, allowing you to enjoy a more comfortable lifestyle without sacrificing your financial security.

Elimination of the Hall Income Tax

Tennessee previously imposed a Hall Income Tax (no relation to the author) on certain interest and dividend income. However, as of January 1, 2021, this tax was fully repealed. Retirees who rely on investment income as a supplement to their retirement funds can now enjoy this income tax-free in Tennessee. This makes the state particularly appealing for individuals with significant investment portfolios, as they can retain more of their earnings.

Low Property Taxes

Tennessee boasts some of the lowest property tax rates in the country. According to data from the Tax Foundation , the average effective property tax rate in Tennessee is about 0.52%, well below the national average of 0.90%.

For retirees, this translates into significant savings on one of the largest fixed expenses in retirement. Additionally, Tennessee offers property tax relief programs for eligible elderly and disabled homeowners through the Tennessee Property Tax Relief Program, further reducing the financial burden. Homeowners who are 65 or older, and fall under income guidelines, may also qualify for the state’s Property Tax Freeze program in certain counties.

No Estate or Inheritance Tax

Another significant benefit for retirees in Tennessee is the lack of estate or inheritance taxes. For individuals concerned about transferring wealth to their heirs, Tennessee’s tax policies ensure that your hard-earned wealth is passed on intact, making it an excellent state for legacy planning.

Sales Tax: A Trade-Off to Consider

While Tennessee offers considerable savings on income, investment, and property taxes, it does have one of the highest sales tax rates in the country. The state sales tax is 7%, with an average combined state and local sales tax rate of approximately 9.61%. Some local jurisdictions charge as much as 2.75% .

For retirees, this high sales tax may seem like a drawback, but it’s worth noting that essential items like prescription medications are exempt from sales tax. Grocery items are currently taxed at a reduced state rate of 4%, plus the local rate, though this has been the subject of recent legislative discussion and temporary relief measures. Additionally, retirees with disciplined spending habits may find that the lack of income and estate taxes more than compensates for the higher sales tax rate.

Cost of Living Advantages

Tennessee’s tax benefits are amplified by its relatively low cost of living. The state’s housing costs, in particular, are notably affordable compared to national averages. Retirees can stretch their dollars further, whether they’re purchasing a home, downsizing, or renting. Lower housing costs also mean smaller property tax bills, further enhancing the financial appeal.

Tax Benefits for Entrepreneurs and Second Careers

Retirement doesn’t necessarily mean the end of earning income. Many retirees choose to pursue second careers, consulting opportunities, or entrepreneurial ventures. Tennessee’s business-friendly environment, with no state income tax on wages and favorable corporate tax policies, is a boon for retirees who want to continue working or start a business.

Moreover, the lack of income tax means retirees can explore part-time work or passion projects without worrying about a significant portion of their earnings going to the state.

Health and Long-Term Care Considerations

While taxes are a crucial factor, healthcare and long-term care costs are equally important for retirees. Tennessee offers a range of healthcare facilities and services at competitive costs. The state’s affordable cost of living and tax benefits can help retirees manage these expenses more effectively. Additionally, Tennessee’s Medicaid program and other state resources can provide support for long-term care needs.

Planning Your Retirement Move

For those considering a move to Tennessee, planning is essential to maximize the state’s tax benefits. Consulting with a financial advisor or CPA familiar with Tennessee’s tax laws can help you structure your finances to take full advantage of the state’s favorable policies. Whether it’s relocating investment accounts, purchasing property, or strategizing your estate plan, proper preparation ensures you’ll reap the maximum benefits. You can find a licensed CPA professional here . To find a CPA Firm in Tennessee, click here: Tennessee Society of CPAs . You can search by entering your city or the area of expertise you’re looking for help in.

About the author

Dave Hall, CPA/PFS is the founder of Retirement Risk Advisors a risk-based family office advisor, RRA Agency a national independent insurance agency, and RRA Strategic Tax Advisors, a high-end tax planning and preparation firm. All companies are based out of Collierville, Tennessee. He is also a member of the American Institute of CPA’s (AICPA)’s PFP Champions task force.