Tennessee General Assembly votes to phase out the state’s “Hall Tax” on unearned income

SummaryState lawmakers approved a bill that reduces Tennessee's Hall income tax on stock and dividend income this year and eliminates it by 2022, a major last-minute act before ending the 2016 legislative session Friday afternoon.Tennessee has never had a state income tax on earned income, and soon will have no state income tax on income of any kind.From Bill to BillOn Wednesday, Rep. Spivey, introduced an amendment to the House version of the Senate bill that removed a conditional nature of the phase out. The amendment passed in the House the same day. The revised bill was approved by the Finance Committee with a voice vote Thursday morning. It was sent back to the full House and it passed later the same day.Later Thursday, a conference committee of the Senate and House was convened. The committee’s report agreed to remove the contingency and guaranteed the phase out of the Hall Tax over six years.The Senate first approved the conference committee report by a 29 to 1 vote. The House passed it by a 66 to 17 margin.The bill is now with Governor Bill Haslam. If Haslam approves the Hall tax bill, the tax rate drops from 6 to 5 percent effective with tax year 2016 on tax returns due by April 15, 2017. It also declares that "the legislative intent" is for the tax be reduced by 1 percentage point annually starting next year. The tax would be eliminated starting with tax year 2022. The Bill will become law upon his signature, or ten days from its passage should he not sign it.Hall Tax By the NumbersThe state Department of Revenue says 204,944 taxpayers filed Hall income tax returns for tax year 2014. (Returns for 2015 were due Monday and have not been fully compiled.) The average liability per 2014 return was $1,446.Taxpayers 65 and older are exempt from the Hall tax if their total income from all sources is $68,000 or less for joint filers and $37,000 or less for single filers. In addition, the first $1,250 in taxable dividend and interest earnings for all single filers and the first $2,500 for all joint filers is tax-exempt.The tax isn't levied on interest earned on savings accounts, certificates of deposit, government bonds, credit unions, bank money-market accounts and dividends from bank stock, insurance companies, credit unions and other sources.The Hall tax, enacted in 1929, generated total revenue of $303.4 million in fiscal year 2014-15 — $197.9 million to the state and $105.5 to cities and counties. Under the law, 62.5 percent of its revenue is retained by the state and 37.5 percent is sent to the municipality where the taxpayer resides — or to the county if the taxpayer lives in an unincorporated area.For more tax and accounting news visit hhmcpas.com/resources or contact us at 423.756.7771.