Most states impose an income tax on their residents, and many state income tax systems treat retirees the same way the federal government does, taxing much of their retirement income. Alabama, however, has several favorable provisions that treat retirees better than the IRS. Let's look at some of the most important ways that Alabama deals with retirees for state income tax purposes.
Social Security: No state income taxThe federal government taxes Social Security benefits under certain circumstances. Take your other taxable income and add in half your benefits, and if the result is more than $25,000 for singles or $32,000 for joint filers, then some of your Social Security will typically be added to your taxable income for federal purposes.
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Alabama exempts Social Security income in full from state income taxation. Regardless of how much money you make in retirement, you won't have to pay additional tax to Alabama on your benefits.
Government and private pension benefits: No state income taxTypically, retirees have to pay federal tax on any pension benefits they receive. In Alabama, however, pensions are typically tax-exempt. That includes federal pensions in the Civil Service Retirement System, state pensions from various groups including state employees and teachers, military retirement pay for former members of the Armed Forces, and payments from defined-benefit retirement plans offered by private employers.
IRA and 401(k) distributions in retirement: Taxed in AlabamaEven though traditional pension benefits aren't subject to tax in Alabama, amounts paid through IRAs and employer-sponsored defined-contribution retirement plans such as 401(k) plan accounts are included in taxable income for Alabama income tax purposes. Alabama does recognize Roth IRA and Roth 401(k) plan distributions as tax-free, matching the federal treatment of these retirement accounts.
Homeowners 65 or older: No state property taxIn addition to income tax benefits, those who are 65 or older and own their own homes are exempt from having to pay state property taxes. However, there are a couple of things to watch out for. First, you have to claim the deduction proactively rather than having it automatically applied to your state property tax bill. In addition, individual counties within the state are allowed to impose property taxes as they see fit, including on those 65 or older. Therefore, you might still have part of your property tax bill to pay regardless of your age.
On the whole, Alabama is a generous state to retirees and older residents. With a variety of tax breaks, the state seems to encourage older residents to come and stay within its borders.
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