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Tax Year 2026Updated July 13, 2026

Does Tennessee Tax Tips in 2026?

No – Tennessee does not tax tips because it has no state income tax. Tennessee has never taxed wages, salaries, or tip income. The state's former Hall Tax applied only to interest and dividend income and was fully repealed effective January 1, 2021. Today, Tennessee has zero income-based taxation of any kind. Tipped workers benefit from the federal OBBBA tips deduction (IRC §224) on their federal return and owe no Tennessee state tax on tips.

How Tennessee's Tips Tax Treatment Works

Tennessee's tax history is unique among no-income-tax states. Unlike states that never had any form of income tax, Tennessee maintained the Hall Income Tax from 1929 to 2021. However, the Hall Tax applied exclusively to interest and dividend income – never to wages, salaries, tips, or other earned income. It was essentially a tax on investment returns, not on work.

The Tennessee legislature began phasing out the Hall Tax in 2016, reducing the rate by 1 percentage point per year from 6% to 0%. The tax was fully eliminated on January 1, 2021. Since then, Tennessee has had no income-based tax of any kind. In 2014, voters approved a constitutional amendment (amending Article II, Section 28) that permanently prohibits a state tax on earned income.

For tipped workers, this means a clean and simple outcome: tip income has never been subject to Tennessee state tax, and now no form of income is taxed. There is no state return to file, no conformity question with the OBBBA, and no state tax liability on tips. Tennessee funds state government primarily through its 7% state sales tax (among the highest in the nation) and various excise taxes.

Federal Tips Deduction Quick Reference

DetailValue
IRC Section§224 (OBBBA)
Maximum deduction$25,000 tips
Deduction typeAbove-the-line (Schedule 1-A)
FICA still applies?Yes (Social Security 6.2% + Medicare 1.45%)
MFS eligible?No (MFJ or Single/HoH only)
Effective datesJan 1, 2025 – Dec 31, 2028
Tennessee treatmentDoes not conform

Worked Examples Comparing Federal and Tennessee Treatment

Example 1: Nashville restaurant server (single filer, $42,000 income, $16,000 in tips)

Federal return:
Qualified tip income: $16,000
Tips deduction claimed: $16,000 (capped at $25,000)
Estimated federal tax savings: $1,920.00

Tennessee return:
Tennessee has no state income tax on wages, salaries, or tips. The $16,000 in tip income is taxed only at the federal level. Tennessee's former Hall Tax (on interest and dividends) was repealed in 2021 and never applied to earned income like tips.

Example 2: Memphis hotel worker (single filer, $60,000 income, $20,000 in tips)

Federal return:
Qualified tip income: $20,000
Tips deduction claimed: $20,000 (capped at $25,000)
Estimated federal tax savings: $4,400.00

Tennessee return:
Tennessee imposes no state tax on earned income. The $20,000 in tips is subject only to federal income tax and FICA payroll taxes. Since the Hall Tax repeal in 2021, Tennessee has no income-based tax of any kind.

Tennessee – From Hall Tax to Fully Tax-Free

Tennessee's path to becoming a fully no-income-tax state is a distinctive story. For nearly a century (1929–2021), Tennessee maintained the Hall Income Tax – a limited tax that applied only to interest and dividends at rates up to 6%. This made Tennessee an unusual hybrid: it taxed investment income but never wages, salaries, or tips. Tipped workers were always exempt from state income tax in Tennessee, even during the Hall Tax era.

The Hall Tax phase-out, which began in 2016 and completed in 2021, was part of a broader political movement in Tennessee toward eliminating all income-based taxation. The 2014 constitutional amendment prohibiting wage and salary taxation cemented this direction. Today, Tennessee is fully free of income taxation in all forms.

Tennessee's high sales tax: Without income tax revenue, Tennessee relies heavily on its sales tax. The state rate of 7% is among the highest in the nation, and local additions can push the combined rate to 9.75%. Tennessee does tax groceries, though at a reduced state rate. While this doesn't directly affect tip income, tipped workers in Tennessee should be aware that the state's consumption-based tax system means higher costs on purchases.

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Frequently Asked Questions

Does Tennessee tax tips or wage income in 2026?
No. Tennessee has never taxed wages, salaries, or tip income. The state's former income tax – the Hall Tax – applied only to interest and dividend income, never to earned income like tips. The Hall Tax was fully repealed effective January 1, 2021, so Tennessee now has no income-based tax of any kind. Tip income is completely free from state taxation.
What was Tennessee's Hall Tax and did it ever apply to tips?
The Hall Income Tax was Tennessee's limited income tax that applied only to interest and dividend income (investment income) at a rate of 6% at its peak. It never applied to wages, salaries, tips, or other earned income. The Tennessee legislature passed a phase-out beginning in 2016, reducing the rate by 1% per year from 6% to 0%. The tax was fully repealed effective January 1, 2021. Today, Tennessee has no income-based tax whatsoever.
What taxes do tipped workers in Tennessee still pay?
Tennessee tipped workers pay federal income tax (reduced by the OBBBA deduction of up to $25,000), Social Security tax (6.2%), and Medicare tax (1.45%, plus 0.9% for high earners). Tennessee has a 7% state sales tax rate (one of the highest in the nation), plus local sales taxes of up to 2.75%. Tennessee has no state payroll tax on employees, no state estate tax, and no local income taxes.
Is Tennessee now fully free of all income taxes after the Hall Tax repeal?
Yes. Since January 1, 2021, Tennessee has been completely free of any state income tax. The Hall Tax was the state's only income-based tax, and its full repeal means there is no tax on wages, salaries, tips, interest, dividends, capital gains, or any other form of personal income at the state level. Tennessee joins the small group of states with truly zero income taxation.
Could Tennessee reintroduce an income tax that covers tips?
It would be extremely difficult. The Tennessee Constitution (Article II, Section 28) was amended in 2014 by voter-approved referendum to permanently prohibit a state income tax on wages and salaries. This constitutional amendment means the legislature cannot impose an earned income tax – including a tax on tips – without another constitutional amendment approved by voters. The political climate in Tennessee makes any such proposal highly unlikely.
Does Nashville or Memphis have a local income tax on tips?
No. No city or county in Tennessee imposes a local income tax. The Tennessee Constitution prohibits local income taxes. Tipped workers in Nashville, Memphis, Knoxville, Chattanooga, and all other Tennessee cities pay zero local income tax on their tips or wages. Local governments in Tennessee are funded primarily through property taxes and local sales taxes.