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Alabama estate tax

There is no estate tax in Alabama. However, residents may still be subject to the federal estate tax if their estate is worth enough. If you live in the Cotton State and are starting to think about estate planning, this guide will explain what you need to know so that you can make sure all of your loose ends are tied up. If you want help with estate planning or with financial planning more generally, think about finding a financial advisor to help. SmartAsset’s free financial advisor matching service can help you find an advisor in your area.

Alabama Estate Tax

Alabama is one of the 38 states in the union that does not levy an estate tax at the state level.

What Is the Estate Tax?

The estate tax is often called the “death tax.” It is a tax levied on the estate of a recently deceased person and is applied before the money is passed on to heirs. Only estates that reach a certain threshold are subject to the estate tax.

The estate tax is not the same as the inheritance tax, which is applied after the money or other assets have already been passed on to a deceased person’s heirs.

Alabama Inheritance and Gift Tax

There is also no inheritance tax in Alabama. The inheritance laws of other states might apply to you, though, if your loved one lived in a state that has an inheritance tax and left you something from their estate. In Pennsylvania, for instance, the inheritance tax applies to out-of-state inheritors. Make sure to look at the laws of the state your grantor lived in once you receive your inheritance.

There is also no gift tax in Alabama. The federal gift tax has a $15,000 annual exemption per gift receiver. You can give up to $15,000 to any number of people without having to declare the gifts in your tax return. There is also a lifetime gift tax exemption of $11.18 million. Exceeding $15,000 in gifts to any one person in a given year counts against that and lowers your federal estate tax exemption.

Federal Estate Tax

Alabama estate tax

No matter how big your estate, you won’t owe any estate tax in Alabama. The federal estate tax still applies, though. The exemption for the federal estate tax is $11.18 million, which increased after the new tax bill was signed in 2018. For married couples, the tax is portable. This means that with the right legal steps up to $22.36 million is protected when both spouses die.

If the estate exceeds that amount, the federal estate tax tops out at 40%. A full federal estate tax rate chart is below.

Here’s how it works. Let’s say you have a $17 million estate and you are not married. Subtract the $11.18 million exemption, leaving a taxable estate of $5.82 million. Looking at the chart, you are in the highest bracket. The base payment on the first $1 million is $345,800. Then you pay 40% on the remaining $4.82 million, which is $1.928 million. That amount plus the base of $345,800 comes out to a total estate tax payment of $2,273,800.

FEDERAL ESTATE TAX RATES
Taxable Estate* Base Taxes Paid Marginal Rate Rate Threshold**
$1 – $10,000 $0 18% $1
$10,000 – $20,000 $1,800 20% $10,000
$20,000 – $40,000 $3,800 22% $20,000
$40,000 – $60,000 $8,200 24% $40,000
$60,000 – $80,000 $13,000 26% $60,000
$80,000 – $100,000 $18,200 28% $80,000
$100,000 – $150,000 $23,800 30% $100,000
$150,000 – $250,000 $38,800 32% $150,000
$250,000 – $500,000 $70,800 34% $250,000
$500,000 – $750,000 $155,800 37% $500,000
$750,000 – $1 million $248,300 39% $750,000
Over $1 million $345,800 40% $1 million

*The taxable estate is the total above the federal exemption of $11.18 million.
**The rate threshold is the point at which the marginal estate tax rate kicks in.

Overall Alabama Tax Picture

Alabama estate tax

Alabama is tax-friendly for retirees. The state does not tax Social Security or private or public pensions. Withdrawals from retirement accounts like 401(k) plans are fully taxed, though the top tax rate for income is a relatively low 5%. The sales tax, though, is among the highest in the country. The base rate for the state is 4%, and with local taxes it can reach as high as 11%. Unlike in some states, food is subject to sales tax in Alabama.

Property taxes, though, are low in the state. The average effective property tax rate is just 0.43%, and the homestead exemption may make it even lower for seniors.

Estate Planning Tips

  • If you’re thinking about your estate, it might make sense to find a financial advisor to help you with planning. SmartAsset can help you find an advisor in your area with our free financial advisor matching service. You answer a few questions and we match you with up to three advisors, all fully vetted and free of disclosures. You can then interview your advisor matches to determine who is a good fit for you.
  • One common estate planning mistake is not naming a guardian for any minor children you have. It isn’t fun to think about, but you’ll sleep better knowing a plan is in place if the worst were to happen.
  • Another key part of estate planning is knowing how much money you’ll have saved in your retirement accounts. SmartAsset’s retirement calculator shows how much money you can expect to have by the time you reach your golden years.

Photo Credit: © iStock/GCShutter, © iStock/Allard1

Ben Geier, CEPF® Ben Geier is an experienced financial writer currently serving as a retirement and investing expert at SmartAsset. His work has appeared on Fortune, Mic.com and CNNMoney. Ben is a graduate of Northwestern University and a part-time student at the City University of New York Graduate Center. He is a member of the Society for Advancing Business Editing and Writing and a Certified Educator in Personal Finance (CEPF®). When he isn’t helping people understand their finances, Ben likes watching hockey, listening to music and experimenting in the kitchen. Originally from Alexandria, VA, he now lives in Brooklyn with his wife.
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