Most Tennesseans would say that Tennessee does not have an individual income tax; however, the Hall income tax applies to interest and dividend income in excess of $1,250 per person.
Those who own S Corporations should be familiar with the tax on dividends paid from the corporation. About 200,000 Tennessee taxpayers pay the Hall income tax which raises about $300 million of the state government's $24 billion in spending.
The Tennessee Department of Revenue website gives an overview and other information on the Hall income tax, introducing it as:
“imposed only on individuals and other entities receiving interest from bonds and notes and dividends from stock. It was enacted in 1929 and was originally called the Hall Income Tax for the senator who sponsored the legislation.”
Earlier this year, Governor Bill Haslam signed the IMPROVE Act that puts an end to the Hall income tax as of 2021. The tax will be phased out by 1% each year. Prior to 2016, the Hall income tax rate was 6%, so a drop of 1% equated to a nearly 17% reduction in what taxpayers owed state government under tax.
Under the present schedule the tax will be assessed as follows:
- 4% for tax years beginning January 1, 2017, and prior to January 1, 2018
- 3% for tax years beginning January 1, 2018, and prior to January 1, 2019
- 2% for tax years beginning January 1, 2019, and prior to January 1, 2020
- 1% for tax years beginning January 1, 2020, and prior to January 1, 2021
- Full repeal for tax years beginning January 1, 2021
As we are approaching year end, this may provide an opportunity to reduce tax expense by postponing dividends until early 2018. It's best to speak with your CPA for questions on how or if to implement this postponement.
