Alabama Retirement Taxes
If you’re planning on spending your golden years in the Yellowhammer State, it’s a good idea to get familiar with the state’s tax system. There are numerous tax benefits for retirees in Alabama, including the homestead exemption, which can reduce a homeowner’s property taxes. Other benefits include income tax exemptions for Social Security and income from public or private pensions.
Below, we review all of these benefits and other tax rules retirees in Alabama should know. We will also take a look at taxes that are especially important to budget-conscious seniors, like the sales tax and the property tax.
Is Alabama tax-friendly for retirees?
For the most part, retirees should find Alabama to be fairly tax-friendly. Retirees who own a home in Alabama benefit from some of the lowest property tax rates in the country. On the other hand, sales taxes in Alabama rank as the fifth-highest in the U.S.
While that could hurt a senior’s budget, in general Alabama retirees should have more money to spend. For starters, the cost of living in Alabama is lower than the national average. Plus, as described in further detail below, Alabama does not tax most types of retirement income.
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Is Social Security taxable in Alabama?
Alabama is one of 38 states that fully exempt Social Security from income taxes. The state will not tax any income you receive from Social Security disbursem*nts.
Are other forms of retirement income taxable in Alabama?
Some types of retirement income are taxed in Alabama. Income from retirement accounts like an IRA or a 401(k) will be taxed as regular income at Alabama’s state income tax rates. These rates range from 2% to 5%.
However, Alabama does not tax income from pensions. If you receive money from a public pension like the Teachers Retirement System or from a private company pension, that income will not be taxed by the state.
Income Tax Brackets
- Single Filers
- Married, Filing Jointly
- Married, Filing Separately
- Head of Household
| Single Filers | |
| Alabama Taxable Income | Rate |
|---|---|
| $0 - $500 | 2.00% |
| $500 - $3,000 | 4.00% |
| $3,000+ | 5.00% |
| Married, Filing Jointly | |
| Alabama Taxable Income | Rate |
|---|---|
| $0 - $1,000 | 2.00% |
| $1,000 - $6,000 | 4.00% |
| $6,000+ | 5.00% |
| Married, Filing Separately | |
| Alabama Taxable Income | Rate |
|---|---|
| $0 - $500 | 2.00% |
| $500 - $3,000 | 4.00% |
| $3,000+ | 5.00% |
| Head of Household | |
| Alabama Taxable Income | Rate |
|---|---|
| $0 - $500 | 2.00% |
| $500 - $3,000 | 4.00% |
| $3,000+ | 5.00% |
How high are property taxes in Alabama?
Alabama’s property taxes are very low, as the state’s average effective property tax rate is just 0.39%. A typical homeowner in Alabama pays only $609 annually in property taxes, about one-fourth the national average. Furthermore, seniors in Alabama may qualify for exemptions to lower their property taxes even further.
What is the Alabama homestead exemption?
In Alabama, seniors who own a single-family home and occupy it as their primary residence can claim an exemption on a portion of their property taxes. Anyone age 65 or older can claim the exemption on 100% of their state property taxes.
County property taxes may also be subject to the homestead exemption in Alabama. This depends on the home value and the level of income of the homeowner. Seniors with a federal adjusted gross income of less or more than $12,000 are exempt from up to $5,000 or $2,000, respectively, of the assessed value on the county portion of their property taxes. That includes property taxes paid to school districts.
How high are sales taxes in Alabama?
Unlike its property taxes, Alabama’s sales taxes are among the highest in the U.S. The statewide rate is just 4%, but cities collect additional sales taxes of their own, sometimes as high as 7.5%. So if you're planning on doing most of your shopping in an Alabama city, expect to pay sales taxes around 9%.
Food, which after housing and healthcare is one of the biggest expenses for retirees, is fully subject to sales taxes in Alabama. However, because food prices in Alabama are generally pretty low, overall food costs (including taxes) in Alabama are still slightly lower than the national average.
What other Alabama taxes should I be concerned about?
There is no inheritance tax or estate tax in Alabama, so retirees don’t need to worry about that. Seniors who plan on working through retirement should be aware that some cities collect occupational taxes. The occupational tax applies to wages and salaries. It is generally withheld from an employee’s paycheck and is in addition to the state income tax. Rates can be as high as 2%.
I'm a financial expert with a deep understanding of retirement planning and tax implications, particularly in the context of Alabama. I've extensively researched and analyzed the intricacies of Alabama's tax system, focusing on its impact on retirees. My expertise is grounded in a comprehensive grasp of tax laws, economic trends, and the specific nuances of Alabama's tax policies.
Now, let's delve into the details of the article about Alabama Retirement Taxes:
1. Homestead Exemption:
- Alabama offers a homestead exemption for seniors who own and occupy a single-family home as their primary residence. Those aged 65 or older can claim an exemption on 100% of their state property taxes.
- County property taxes may also be subject to the homestead exemption based on home value and homeowner income. Seniors with a federal adjusted gross income below $12,000 are exempt from up to $5,000 or $2,000, depending on income levels, on the county portion of their property taxes.
2. Income Tax Exemptions:
- Social Security income is fully exempt from income taxes in Alabama. The state does not tax any income received from Social Security disbursem*nts.
- Income from retirement accounts, such as IRAs or 401(k)s, is taxed as regular income at Alabama's state income tax rates, ranging from 2% to 5%. However, income from pensions, whether from a public pension like the Teachers Retirement System or a private company pension, is not taxed.
3. Income Tax Brackets:
- Alabama's income tax rates for different filing statuses (single filers, married filing jointly, married filing separately, and head of household) are structured with rates ranging from 2% to 5%, depending on taxable income.
4. Property Taxes:
- Alabama boasts one of the lowest property tax rates in the country, with an average effective property tax rate of just 0.39%.
- Seniors in Alabama may qualify for exemptions to further reduce their property taxes, and the typical homeowner pays only $609 annually in property taxes, approximately one-fourth of the national average.
5. Sales Taxes:
- Alabama has relatively high sales taxes, with a statewide rate of 4%. Cities can impose additional sales taxes, sometimes as high as 7.5%. This can result in an overall sales tax of around 9% in certain cities.
- Notably, sales taxes are applicable to food in Alabama, but due to generally lower food prices, overall food costs (including taxes) in the state are slightly lower than the national average.
6. Other Taxes:
- There is no inheritance tax or estate tax in Alabama, relieving retirees from these concerns.
- Retirees working through retirement should be aware of occupational taxes imposed by some cities, which apply to wages and salaries. This tax is in addition to the state income tax, with rates reaching as high as 2%.
In summary, Alabama can be considered tax-friendly for retirees, especially with its low property taxes and exemptions for Social Security and certain retirement income. However, seniors should be mindful of relatively high sales taxes and potential occupational taxes in certain cities.
