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Tennessee’s Hall Income Tax Phase-Out Begins 2017

Posted on: May 4th, 2017
legislationTennessee has a favorable tax reputation. While it is widely recognized that Tennessee does not impose income tax on wages, the state levies the Hall income tax on dividend and interest income. However, that tax is no longer permanent. Legislation enacted one year ago approved full repeal of the Hall income tax by January 1, 2022.

The Hall income tax for the 2016 tax year was 5 percent. While the law proposed to incrementally reduce the Hall tax by 1 percent annually, the Tennessee Department of Revenue issued a memo notifying taxpayers that the tax rate will remain 5 percent unless annual legislation passes to reduce the rate by a percentage point.

Although additional proposed legislation concerning the Hall income tax is currently under review by lawmakers, the outcome of the bills would not affect the tax rate on taxpayers. These pieces of legislation, H.B. 548 and H.B. 497, propose to change share distributions of the Hall income tax to local government and the general fund. If passed, the changes would take effect on July 1, 2017. The bills do not address the 1 percent annual reduction of the Hall tax.

The state provides a $1,250 annual exemption ($2,500 for married couples filing jointly) on total taxable dividend and interest income. Until the tax fully repeals in 2022, the types of income that remain taxable beyond the exemption amount are listed on page 3 in the state-provided Hall income tax guide. In addition to income received via cash and check, tax also applies to merchandise or commodities, and credits on the books of banks, brokers, or other agents. The state provides exemptions to individuals with certain disabilities, or who meet age and income thresholds. Full details provided on page 2 of the guidance form at the prior link. 

Many of the income-producing assets noted above may be part of estates. Properly calculating, reporting, and paying the Hall income tax during estate administration is the executor or personal representative’s duty. To prevent tax reporting errors during probate, executors can seek probate counsel and schedule a tax evaluation with a Tennessee tax attorney.

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