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Alabama enjoys the distinction of being one of the most tax-friendly states in the country. This is particularly true if you’re a retiree looking to settle down and enjoy the fruits of your lifetime’s labor. Although not all your retirement plans are tax-free in the state, the majority are. Alabama offers some other tax breaks for retirees as well.
As of the time of publication, 27 states and the District of Columbia declined to tax Social Security benefits. Alabama is one of them. Your entire Social Security income is yours to keep if you live in this state.
Alabama dos not impose income taxes on government pensions. Under the state’s laws, government pensions include a wide array of plans, including military, civil service, police, firefighters’, railroad, teachers’, veterans’ and all federal pensions. If you worked for a municipality, local government pensions are also exempt from income tax.
Alabama is a little pickier regarding private pensions. Only defined benefit plans are exempt from taxation. Generally, government pensions are defined pension plans, but some large corporate employers offer them as well. In these plans, your employer makes all the contributions based on how long you worked for the company and how much you earned while you remained employed there. All other retirement plans are subject to income tax, including annuity income and tax-deferred plans once you tap into them. Interest income is also taxable, except that which is generated by government bonds.
If your retirement plan doesn’t qualify as a government pension and is not a defined benefit plan, you’ll pay 5 percent on the income over $3,000 each year, or $6000 if you’re married and file your tax return jointly. The percentage decreases if your pension payments are less than that. You have to file a return in Alabama if your income exceeds $4,000, or $10,500 if you’re married and filing jointly. If you’re over the age of 65, you don’t have to pay any state property taxes, but some individual cities impose property taxes. Depending on where you live, you might not escape this tax entirely. Alabama’s sales tax is only 4 percent as of the time of publication, but there’s a 10 cent tax on every prescription sold. Local municipalities have the right to charge their own sales taxes, over and above the state sales tax, if they choose.
- Retirement Living Information Center: Taxes By State
- Alabama Department of Revenue: Frequently Asked Questions Alabama Individual Income Tax
- Tax Policy Center: Savings and Retirement – What Are Defined-Benefit Retirement Plans?
- National Conference of State Legislatures; State Personal Income Taxes on Pensions and Retirement Income: Tax Year 2010; February 2011
- Alabama Department of Revenue Sales, Use and Business Tax Division: Pharmaceutical Providers Tax Rule