Tool | November 2017

State-by-State Guide to Taxes on Retirees

Alabama

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The Bottom Line
Map of Alabama

Tax-Friendly

The Yellowhammer State is tax-friendly to retirees. Most pensions and Social Security are exempt from state income taxes. Homeowners 65 and older don't pay state property taxes, and can qualify for breaks on county and local property taxes as well. A catch: Sales taxes are high, and even apply to food.

State Sales Tax

4% state levy. Localities can add as much as 7.5% to that, and the average combined rate is 9.1%, according to the Tax Foundation. Alabama is one of the few states that does not exempt food from its state sales tax.

Income Tax Range

Low: 2% (on up to $1,000 of taxable income for married joint filers and up to $500 for all others)

High: 5% (on more than $6,000 of taxable income for married joint filers and more than $3,000 for all others)

Alabama also allows residents to deduct all of their federal income tax from state taxable income.

Effective income tax rate: 4.9%/individual, 4.9%/joint

Social Security

Benefits are not taxed.

Exemptions for Other Retirement Income

Military, civil-service, state and local government, and qualified private pensions are exempt. Out-of-state government pensions are tax-exempt if they are defined-benefit plans. Railroad Retirement benefits are exempt. Distributions from IRAs and employer-based defined-contribution plans, such as 401(k)s and 403(b) plans, are taxable.

IRAs

Taxable at ordinary income tax rate.

401(k)s and Other Defined-Contribution Employer Retirement Plans

Taxable at ordinary income tax rate (up to 5%).

Private Pensions

Qualified private pensions are exempt.

Public Pensions

Military, civil-service, and state and local government pensions are exempt. Out-of-state government pensions are tax-exempt if they are defined-benefit plans. Railroad Retirement benefits are exempt.

Property Taxes

The median property tax on Alabama's median home value of $128,500 is $550

Tax breaks for seniors: All homeowners 65 or older are exempt from the state portion of property taxes. Taxpayers age 65 and older with net taxable income of $12,000 or less on the combined (taxpayer and spouse) federal income tax return are exempt from all property taxes on their principal residence.

Vehicle Taxes

Car sales are taxed at 2% by the state (half of the general tax), and municipalities can add to that, with the maximum local levy at 5.25%. Most vehicles are subject to an annual property tax, with rates set by municipality. The levy applies even to vehicles not used on the road.

In Shelby County, for example, the tax on a private passenger vehicle valued at $16,800 would be approximately $124 per year.

Inheritance and Estate Taxes

There is no inheritance tax or estate tax.