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Focus on the law: State Income Tax

By Sharon Frankenberg,
Attorney at Law

You may have heard that one of the many reasons the Great State of Tennessee is an especially wonderful place in which to live and do business is because it does not have an income tax.  This is not completely accurate.  True, there is no tax on earned income such as wages.  There is even a proposed amendment to Article II Section 28  of the Constitution of Tennessee to explicitly prohibit the general assembly from levying, authorizing or otherwise permitting any state or local tax upon payroll or earned personal income or any state or local  tax which is measured by payroll or earned personal income.  This proposed amendment will be on the ballot in the 2014 general election.  However, if approved, this amendment will not prohibit any tax in effect on January 1, 2011 or prevent the adjustment of the tax rate of any such tax.  This caveat refers to the income tax that we currently have in place in Tennessee:  the Individual Income Tax.

Enacted in 1929, this tax was originally called the Hall income tax after the state senator who sponsored the legislation.  The tax is imposed on individuals and other entities receiving interest from bond and notes and dividends from stock.  The tax applies to individuals, partnerships, associations and trusts that are legally domiciled in Tennessee. A person who is legally domiciled in another state but maintains a place of residence in Tennessee for more than six months of the year is also subject to the tax; this does not apply to military personnel and full-time students who are legally domiciled in another state. The income a person receives while legally domiciled in Tennessee is subject to the tax. Some items considered in determining “legal domicile” are:  where you are registered to vote, where you maintain your driver’s license and where you maintain your permanent or principal residence (as opposed to a temporary residence like a vacation home).

There are numerous distinctions and examples of what is and is not taxable under this law.    Taxable income subject to the Individual Income tax includes dividends from stock in:  all corporations, insurance companies not licensed to do business in Tennessee, all holding companies, and state-chartered banks outside Tennessee not doing business in Tennessee.  On the other hand, dividends from national banks and Tennessee-chartered banks are considered nontaxable.  The individual income tax guidance available on the State Department of Revenue’s website should be reviewed very carefully before filing a tax return.

Any person 65 years of age or older having a total annual income below $33,000 for single filers and $59,000 for joint filers is exempt from the tax. Total annual income includes income from all sources including social security income.  Income from stocks and bonds of pension trusts and profit-sharing trusts which are exempt from federal income taxation are also exempt from the state income tax. This includes such accounts as IRA and 401(k) accounts. Distributions from IRAs and 401(k) plans are also exempt.

There is an exemption of the first $1,250  taxable interest and dividend income for single filers and $2.500 for married couples filing jointly.   All taxable dividend and interest income exceeding this exemption is taxed at the rate of 6%.   Five-eighths of the income tax revenue collected from the Individual Income tax is deposited into the state’s general fund.   The remaining  three-eighths is distributed to the city or county where the taxpayer resides.  You should absolutely consult an attorney or tax advisor for assistance and advice with your individual situation.  Sharon Frankenberg is an experienced attorney licensed in Tennessee since 1988. Her office number in Knoxville is (865)539-2100.

 

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