Alabama generally does not tax Social Security. You may also be able to avoid taxes on other types of retirement income.
Tax on Social Security Benefits in Alabama
Alabama completely exempts Social Security benefits from state income taxes. Unlike federal taxes, it doesn’t matter what your income is.
Your Social Security benefits are always exempt from Alabama income tax.
Does Alabama tax other retirement income?
Alabama generally doesn’t tax pensions. This includes pensions from Alabama state and local government jobs, pensions from other states, federal government pensions, and private pensions.
Arizona does tax distributions from IRAs and 401(k)s. That’s because those types of accounts are considered deferred-tax accounts. You get a tax deduction when you contribute in exchange for paying taxes when you withdraw.
You may also have to pay taxes if you have income from a taxable investment account, savings account, or CDs. Of course, if you take a part-time job in retirement, that income is also subject to taxes.
One thing to note is that even if some of your income is taxable, the fact that your Social Security income is tax-free can keep you in a lower Alabama tax bracket.
Alabama Tax Benefits for Retirees
Another tax benefit for retiring in Alabama is not having to pay property taxes once you turn 65. You can generally qualify for this benefit on your primary residence.
Alabama also has no estate or inheritance taxes.
Is it better to retire in Alabama, Florida, or Tennessee?
Florida and Tennessee often come up as alternatives to Alabama since they’re neighboring states with no income taxes at all.
Based on the general cost of living, sales tax, vehicle property taxes, and other factors it can be cheaper to retire in Florida or Tennessee than in Alabama. Of course, it will vary depending on exactly where in each state you’re looking.
You should compare local tax rates and other costs for each city you’re considering living in.
Escaping from California? Don’t forget to break your California residency.