Does Alabama Tax Retirement Income? What to Know

Alabama is considered a tax-friendly destination for retirees, but the actual tax burden depends on the specific sources of an individual’s retirement income. The state’s tax laws create advantages for certain types of retirement funds while treating others as regular income. Understanding these differences is important for anyone planning to spend their retirement years in Alabama. The tax treatment extends beyond income, as property and sales taxes also play a role in a retiree’s financial picture.

Tax-Exempt Retirement Income in Alabama

A reason for Alabama’s reputation as a retirement haven is its favorable treatment of several common retirement income streams. All Social Security benefits are fully exempt from state income tax. This complete exemption applies regardless of a retiree’s total income.

The state also fully exempts payments from defined-benefit pension plans. These plans, often called traditional pensions, provide a fixed, recurring monthly payment to retirees. This exemption covers pensions from both the private sector and public employment, such as those for teachers, state employees, and other government workers.

Alabama does not tax military retirement pay, and this exemption covers all retirement benefits received for service in the armed forces. Income from the Railroad Retirement Act is also fully exempt from Alabama’s state income tax.

Taxable Retirement Income in Alabama

While many retirement income sources are exempt, income from defined-contribution plans like traditional 401(k)s, traditional IRAs, and 403(b)s is generally taxable. However, the state provides an exemption for older residents. For those aged 65 and older, the first $6,000 of this retirement income is exempt from state taxes.

Any amount withdrawn beyond this exemption is taxed at Alabama’s standard income tax rates, which range from 2% to 5%. It is important to understand which accounts fall into this taxable category.

Other Key Alabama Taxes for Retirees

Beyond income tax, other state and local taxes affect a retiree’s budget. Alabama has some of the lowest property tax rates in the nation. Additionally, the state offers homestead exemptions for older residents, and homeowners aged 65 or older are exempt from the entire state portion of property taxes.

Further exemptions on local property taxes are available based on age and income. For instance, those 65 or older with a combined net taxable income of $12,000 or less on their federal return may be exempt from all property taxes. To receive these benefits, homeowners must apply for the homestead exemption with their local county taxing official.

In contrast to its low property taxes, Alabama’s combined state and local sales taxes can be high. The statewide sales tax rate on general merchandise is 4%, but with local taxes, the total can reach 10% or more in some areas. Alabama’s sales tax applies to groceries, and the state sales tax on eligible food items is scheduled to be reduced to 2% in September 2025, though local sales taxes will still apply.