Tennessee has a unique tax system, so it’s important to understand the laws and regulations that apply in this state if you live there or are planning a move. Tax guidelines in Tennessee are different from most other states because there’s no state income tax. However, the state is known for its high sales tax. These tax laws are controversial because many believe middle- and low-class families end up paying more in taxes than wealthy residents.
While many tax strategists disagree with this regressive tax system, if you live in the state, you must adhere to these tax laws. Review the following information on Tennessee taxes so you can better understand what you may owe and when you must pay.
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Tennessee Income Tax
Tennessee doesn’t impose a state income tax, but if you earned income throughout the year, you’re still required to pay federal income taxes. While the income you earn is not taxed by Tennessee, the state does impose a Hall tax, which applies to bonds, notes, or dividends from stocks.
This tax was enacted in 1929 and was named after the senator who originally sponsored the legislation. According to this state tax law, if you earned interest or dividends on these investment vehicles throughout the year, you must claim it and pay taxes on it.
However, you’re only responsible for claiming this income if it’s over $1,250. If you made less than that in interest and dividends, you aren’t responsible for filing a Hall income tax return with the Department of Revenue. There are additional exemptions to the Hall income tax, including residents who are:
- 65 years of age or older with an annual income that’s $26,000 or less;
- 100 years of age or older.
If you aren’t exempt from filing your tax return on the interest you earned throughout the year, you must file by April 15. Tennessee is one of the few states that doesn’t implement a pension tax on government workers’ pension plans.
Tennessee Sales and Use Tax
When you make a purchase in Tennessee, you pay sales tax on taxable goods or services you buy. The sales tax you pay accounts for 60% of the state’s tax collections and is distributed to both the state and local governments. The general state sales tax is 7% but local counties and cities can adjust the rate as they see fit. Local governments may increase the sales tax rate by as much as 2.75%.
Sellers are responsible for collecting sales tax from customers for the sale of tangible personal property and other transactions, such as:
- Installation and repair;
- Telecommunication services;
- Digital products;
- Computer software;
- Warranties or contracts for personal property;
- Software maintenance contracts.
When a seller doesn’t collect sales tax from a buyer on taxable goods or services bought or shipped into Tennessee, a use tax is due on the transaction. A use tax usually applies when you buy goods online from an out-of-state seller. The use tax is calculated the same way the sales tax is determined. Nonprofit organizations registered with the state are exempt from sales and use taxes.
Tennessee Property Tax
If you own property in Tennessee, you must pay property taxes, which are determined by the property’s assessed value and local tax rate. Your county or city property assessor evaluates your property to calculate its appraised value.
To calculate your property’s assessed value, the appraised value is multiplied by the assessment ratio. For residential property, the assessment ratio is 25%. This number is multiplied by the local tax rate, which may vary, to determine how much you owe. For example, in Nashville, the tax rate for 2018 was $3.155. The current property tax rate in Knox County is $2.12.
Your county assessor sends a property tax bill by mail the first week of October every year. Your property taxes are due by the end of February. If you don’t pay your property taxes in full by the end of February, they’re subject to interest charges until the full amount is paid.
Other Taxes in Tennessee
If you own a business in Tennessee, you may be responsible for paying a franchise and excise tax to the state. Businesses that are required to file franchise and excise taxes include the following:
- Limited liability companies;
- Limited partnerships;
- Business trusts.
The franchise tax is based on the property a business owns while the excise tax is related to the business’s annual income or net earnings.
The franchise tax rate is .25% of the total net worth a company holds at the close of the tax year, including both tangible and real property. The excise tax is 6.5% of the net earnings and taxable income an eligible business earns at the end of the year. These taxes are due on April 15 but business owners can also choose to make quarterly payments throughout the year.
Filing Taxes in Tennessee
Tennessee doesn’t have a graduated state income tax, income tax bracket, or estate tax like many states. However, you may still owe Hall income taxes. If you earned interest or dividends throughout the year, you must pay taxes on your earnings. You can file a paper tax return with the Tennessee Department of Revenue. If you owe taxes on your earnings, you must also provide payment with your return.
The Department of Revenue makes it easy to file and pay taxes online using the Tennessee Taxpayer Access Point (TNTAP). You’re not required to create an account to file your Hall income taxes. However, when you register for an account, the system saves your information so you can check on your return status and view past returns.
You must provide your contact information, Social Security number, and information on the interest and dividends you earned throughout the year. The system calculates the taxes you owe and you can use a bank account or credit card to pay.
This review of Tennessee tax guidelines helps you understand if you owe taxes and when they’re due. By filing your return and submitting payment correctly and on time, you can avoid consequences imposed by the state and local governments.
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