If you’ve owned a home in another state, you might be aware that Alabama has some of the lowest property tax rates in the country. In fact, Alabama exempts taxpayers over 65 from the state portion of property taxes.

But did you also know that retirement income from many sources is not subject to Alabama income tax? Generally, the following are exempt (please refer to this list from Alabama):

• Federal Social Security
• Military Retirement
• Most government pensions including from both the Federal Government and certain state or local retirement plans in Alabama,
• Defined benefit plans (traditional pensions), and
• Railroad Retirement

To be clear, income received from other retirement plans will still be subject to income tax in Alabama.

It is not uncommon for clients to discover that they had previously paid Alabama income tax when preparing their own tax returns or using an out-of-state preparer. 

But...

One way in which Alabama does not provide much tax relief is with its sales tax. In fact, Alabama ranks 5th in the country for highest sales tax rates, with a combined (state and local) average of 9.14%. On top of that, many states offer structured sales tax for various goods. In other words, groceries might be taxed at a lower rate, such as 1.5% or not at all. Here in Alabama we often pay the full rate depending on our location. However, a couple of sales tax holidays help shoppers save on items related to Back-to-School and Severe Weather Preparedness.