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Tennessee Taxes: What You Need to Know

Federal, State, and Local Tax Withholding in Tennessee in 2024

In 2024, Tennessee residents are primarily subject to federal tax withholding, as the state does not levy an income tax on wages, a significant benefit for its residents. Here’s a detailed overview of the tax structure:

Federal Income Tax

Tennessee residents must adhere to the federal progressive income tax system, which has rates ranging from 10% to 37% depending on income levels. The federal tax brackets for 2024 are as follows:

• 10% on income up to $11,000
• 12% on income from $11,001 to $44,725
• 22% on income from $44,726 to $95,375
• 24% on income from $95,376 to $182,100
• 32% on income from $182,101 to $231,250
• 35% on income from $231,251 to $578,125
• 37% on income over $578,125

This system ensures that higher earners pay a larger percentage of their income in taxes, thus maintaining a level of equity in the taxation process .

State Income Tax

One of the most attractive features of living in Tennessee is the absence of a state income tax on wages. This means that residents do not have to pay state-level income taxes, allowing them to retain more of their earnings. This policy is a significant draw for both individuals and businesses considering relocation to the state .

Local Taxes

While Tennessee does not impose a state income tax, local taxes can vary significantly by municipality. Some cities may levy specific taxes on residents, including property taxes or sales taxes. For example, major cities like Nashville and Memphis may have different tax rates that can affect overall financial planning. Residents are encouraged to check local regulations to understand any applicable local taxes that may impact their income or purchases.

Sales Tax

Sales tax ranges between 7-9.75%.

FICA (Federal Insurance Contributions Act) taxes are mandatory for all residents of Tennessee, just as they are for residents in every other state. These taxes fund two primary federal programs: Social Security and Medicare. The contributions for 2024 are structured as follows:

Social Security

• Rate: Employees contribute 6.2% of their gross wages to Social Security.
• Income Limit: This contribution is applicable only up to a wage cap of $168,600. Any earnings above this threshold are not subject to Social Security tax.

Medicare

• Rate: For Medicare, the standard contribution rate is 1.45% of all wages earned.
• Additional Tax: For high-income earners, there is an additional 0.9% tax on income exceeding $200,000 for single filers. This additional tax is not subject to any income limit, meaning it applies to all earnings beyond the $200,000 threshold.

Employer Contributions

Employers are required to match the FICA contributions made by their employees. This means that employers also contribute 6.2% for Social Security and 1.45% for Medicare, effectively doubling the amount that goes into these federal programs for each employee. This matching ensures that both parties share the responsibility of funding Social Security and Medicare, which are essential for providing benefits to retirees and disabled individuals in the United States.

Overall, the structure of FICA taxes in Tennessee mirrors that of other states, adhering to federal guidelines. Tennessee residents benefit from no state income tax, but they do have to navigate FICA and any applicable local taxes, which can vary by municipality.

For more information on FICA and tax rates in Tennessee, you can check the Social Security Administration and the Tennessee Department of Revenue.

Pre-Tax Deductions (Medical Insurance, 401K, etc.) in Tennessee in 2024

Tennessee residents can take advantage of several pre-tax deductions that significantly reduce their taxable income. These deductions not only lower the amount of income that is subject to taxation but also help individuals save for health and retirement expenses, enhancing overall financial wellness. Below is a breakdown of the key pre-tax deductions available to residents in 2024:

Health Insurance Premiums

Contributions for medical, dental, and vision insurance from employer-sponsored plans are typically deducted pre-tax. The specific amount deducted varies based on the plan chosen by the employer and the coverage level selected by the employee. By utilizing pre-tax deductions for health insurance, employees can lower their taxable income and, in turn, their tax liability.

401(k) Contributions

Employees can contribute up to $23,000 to a 401(k) retirement plan in 2024. For individuals aged 50 and older, there is an additional catch-up contribution of $7,500, allowing them to save a total of $30,500 for retirement. Contributing to a 401(k) not only reduces current taxable income but also helps build a nest egg for future retirement needs.

Health Savings Accounts (HSAs)

HSAs provide an opportunity for individuals enrolled in high-deductible health plans to save for medical expenses with tax advantages. In 2024, the contribution limit for individuals is $4,150, while families can contribute up to $8,300. Contributions to HSAs are tax-deductible, and withdrawals for qualified medical expenses are tax-free, making HSAs a powerful tool for managing healthcare costs.

Flexible Spending Accounts (FSAs)

FSAs allow employees to set aside pre-tax dollars for medical expenses. For 2024, the contribution limit for FSAs is $3,050. This can cover out-of-pocket medical costs, prescriptions, and some dependent care expenses. Like HSAs, FSAs reduce taxable income, but they typically have a “use-it-or-lose-it” policy, meaning any unspent funds may be forfeited at the end of the plan year.

2024 Tennessee Tax Table Example

Median Household Income in Tennessee

As of 2023, the median household income in Tennessee is approximately $67,631. This figure provides insight into the economic well-being of residents and reflects the diverse economic landscape of the state.

Tennessee Tax Brackets 2024

Tennessee is unique in that it does not levy a state income tax on wages, simplifying tax obligations for residents.