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Alabama Retirement Tax Friendliness

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Overview of Alabama Retirement Tax Friendliness

Alabama fully exempts Social Security retirement benefits from income taxes. 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 fourth highest in the U.S.

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You will pay of Alabama state taxes on your pre-tax income of
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is toward retirees.
Social Security income is taxed.
Withdrawals from retirement accounts are taxed.
Wages are taxed at normal rates, and your marginal state tax rate is %.
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Alabama Retirement Taxes

Photo credit: ©iStock.com/Kajdi Szabolcs

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 will 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 fourth highest in the U.S.

While that could hurt a senior’s budget, in general retirees in Alabama should have more money to spend. For starters, the cost of living in Alabama is about 10% lower than the national average. Plus, as described in further detail below, Alabama does not tax most types of retirement income.

Is Social Security taxable in Alabama?

No. Alabama is one of 37 states that fully exempt Social Security from income taxes. The state will not tax any income you receive from Social Security disbursements.

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. Tax 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
Alabama Taxable IncomeRate
$0 - $5002.00%
$500 - $3,0004.00%
$3,000+5.00%
Married, Filing Jointly
Alabama Taxable IncomeRate
$0 - $1,0002.00%
$1,000 - $6,0004.00%
$6,000+5.00%
Married, Filing Separately
Alabama Taxable IncomeRate
$0 - $5002.00%
$500 - $3,0004.00%
$3,000+5.00%
Head of Household
Alabama Taxable IncomeRate
$0 - $5002.00%
$500 - $3,0004.00%
$3,000+5.00%

How high are property taxes in Alabama?

Alabama’s property taxes are very low. The state’s average effective property tax rate is just 0.43%. A typical homeowner in Alabama pays only $550 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. At the current state mill rate of 6.5 mills that part of the exemption is equal to about $65 of savings per $100,000 in property value.

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. In general, seniors with a federal adjusted gross income of less than $12,000 are exempt from $5,000 of the assed 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 6%. So if you are planning on doing most of your shopping in any Alabama city, expect to pay sales taxes of at least 7% and maybe as high as 10%.

Photo credit: ©iStock.com/Anna Bryukhanova

Food, which after housing and healthcare is one of the biggest expenses for retirees, is fully subject to sales tax 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 estate tax in Alabama (or inheritance tax), 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%.

Most Tax Friendly Places for Retirees

SmartAsset’s interactive map highlights the places in the country with tax policies that are most favorable to retirees. Zoom between states and the national map to see the most tax-friendly places in each area of the country.

Highest
Lowest
Rank City Income Tax Paid Property Tax Rate Sales Tax Paid Fuel Tax Paid Social Security Taxed?

Methodology Our study aims to find the areas with the most tax-friendly policies for retirees. To do that we looked at how the tax policies of each city would impact a retiree with a $50,000 income. Our hypothetical retiree is getting $15,000 from Social Security benefits, $10,000 from a private pension, $15,000 from retirement savings like a 401(k) or IRA and $10,000 in wages.

To calculate the expected income tax this person would pay in each location we applied deductions and exemptions. This included the standard deduction, personal exemption and deductions for each specific type of retirement income. We then calculated how much this person would pay in income tax at the federal, state, county and local levels.

We calculated the effective property tax rate by dividing median property tax paid by median home value for each city.

In order to determine sales tax burden we estimated that 35% of take-home (after-tax) pay is spent on taxable goods. We multiplied the average sales tax rate for a city by the household income less income tax. This product is then multiplied by 35% to estimate the sales tax paid.

For fuel taxes, we first distributed statewide vehicle miles traveled down to the city level using the number of vehicles in each county. We then calculated miles driven per capita in each city. Using the nationwide average fuel economy, we calculated the average gallons of gas used per capita in each city and multiplied that by the fuel tax.

For each city we determined whether or not Social Security income was taxable.

Finally, we created an overall index weighted to best capture the taxes that most affect retirees. We gave a 4x weighting to income tax, 3x weighting to property tax rate, a 2x weighting to sales tax and 1x weighting to fuel tax.

Sources: Internal Revenue Service, Social Security Administration, state websites, local government websites, US Census Bureau 2016 American Community Survey, Avalara, American Petroleum Institute, GasBuddy, UMTRI, Federal Highway Administration