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Question: Are taxable distributions from a non-qualified deferred annuity subject to the Tennessee state income tax (Hall tax)?
Answer: Yes. Dividend and interest income in Tennessee is generally subject to the Hall tax. Such income in excess of a small exemption amount is taxed at a flat rate of 6 percent.
The instructions to the Tennessee income tax return lists the type of income that is subject to the tax:
3. Any distribution which does not qualify as a return of capital and is otherwise taxable. (Emphasis added.) In order to qualify as a return of capital, it must be shown that part of the shareholder’s investment is being returned to the shareholder and that, as a result, the capital of the company is actually reduced.
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