Tax in Alabama: a complete guide
If you’re planning on moving to the state or want a refresh on your tax obligations, getting your head around Alabama’s various taxes can feel overwhelming. This Alabama tax guide should help you to break it down, exploring everything from the state income tax to the ins and outs of property tax.
Alabama is considered a low-tax state compared to elsewhere in the US.
The cost of living will be essential to determine whether Alabama is the right state for you. While it has some of the lowest property taxes in the country and is widely considered a retirement tax-friendly state, it has some of the highest sales tax you will find.
Whether you’re hoping to relocate for retirement or your next working chapter, proper financial research is necessary.
Alabama income tax
As you’re probably already aware, if you’re a taxpaying US citizen, federal tax laws apply to you regardless of the state you choose to call home, and following tax law is essential. There are seven different federal income tax brackets as of 2023, which primarily dictate how much you’ll owe each tax year.
Additionally, Alabama charges state income tax. It has a graduated individual income tax, ranging from 2 percent to 5 percent.
Income take brackets are broken down as follows:
For single people, heads of families, and married people filing separate returns:
|Taxable income||Tax rate|
For married people filing a joint return:
|Taxable income||Tax rate|
Alabama has a 6.50 percent corporate income tax rate.
Alabama sales tax
Statewide sales tax in Alabama is 4 percent.
Alabama also has local sales tax rates, with a maximum local rate of 7.50 percent. The average combined state and local sales tax rate stands at 9.25 percent.
So, what exactly is taxed?
Tax on food, specifically federal Supplemental Nutrition Assistance Program (SNAP) foods which include the majority of regular groceries, is currently 4 percent. This will lower to 3 percent on September 1, 2023. If Alabama’s Education Trust Fund meets a specific growth benchmark, this will reduce again to 3 percent on September 1, 2024.
Alcohol is not tax-exempt. Vendors are responsible for paying a state excise tax on these items. They include:
Alabama Beer tax is $0.53 per gallon.
Alabama win tax is $1.70 per gallon.
Some items exempt from sales tax include prescription drugs, gasoline and motor oil, and seeds for planting purposes.
Alabama property tax
Alabama boasts some of the lowest property taxes in the country. According to a recent report from the Public Affairs Research Council of Alabama (PARCA), the average person in the state paid just $632 in property taxes in 2020.
Property taxes in the state is based on property tax is based on property classification, millage rates, and exemptions.
Taxes are calculated using your property’s assessed value. This is determined by multiplying the appraisal value by the property classification to get your assessed value.
Properties are broken into four categories, each with its corresponding assessment percentage. According to the Alabama Department of Revenue, property classes include:
|I||All property of utilities used in the business of such utilities||30%|
|II||All property not otherwise classified||20%|
|III||All agricultural, forest and single-family owner-occupied residential property, including owner-occupied residential manufactured homes located on land owned by the manufactured home owner, and historic buildings and sites||10%|
|IV||All private passenger automobiles and motor trucks of the type commonly known as “pickups” or “pickup trucks” owned and operated by an individual for personal or private use and not for hire, rent, or compensation||15%|
Once the assessed value of your property is calculated, it is multiplied by the appropriate millage rate for the area in which you live. The county commissions and other taxing agencies determine millage rates.
Your Assessed value multiplied by your millage rate will then give you your tax bill.
Assessed Value X Millage Rate = Unadjusted Tax Bill
The good news is that Alabama’s low property tax rates will likely remain. According to PARCA, Alabama property tax rates on property, including homes, farmland, and timberland, are protected by the state constitution, making them very difficult to raise.
Alabama motor tax
If you buy a new vehicle in Alabama, including off-road motorcycles and ATVs, you will be charged a car sales tax of 2 percent. This includes both new and used cars.
However, individual city and country vehicle sales taxes can push this higher, with total vehicle sales taxes coming in at between 3.375 percent and 4 percent. Total tax rates change dramatically depending on your area.
Alabama estate tax
Whether expecting to receive an inheritance or hoping to leave something behind for your loved ones, you may be concerned about how this monetary gift will be taxed.
Fortunately, Alabama does not impose inheritance tax. However, if you’re estate worth exceeds a specific amount, you may be subject to federal estate tax.
Only six American states require residents to pay any state inheritance tax as of 2023, and only 12 states currently impose estate taxes. So it’s worth looking into your possible inheritance liabilities if you receive money from someone who isn’t a resident of Alabama.
Alabama retirement tax
When it comes to friendliness for retirees, Alabama is a safe bet.
The state does not tax your income from Social Security checks, meaning your Social Security retirement benefit will be tax-free. It also does not tax income from pensions.
Income from retirement accounts such as a 401(k) or IRA is subject to regular state income tax, ranging from 2 percent to 5 percent.
Alabama is also widely considered one of the best states to retire on a fixed income.
A fixed income from retirement savings, inheritance, or Social Security offers little to no flexibility regarding the monthly amount you get. Therefore, you need a state where housing markets aren't volatile, and the cost of living isn't too high (so you can still cover unexpected expenses). With an affordable housing market, low cost of living, and low retirement taxes, Alabama offers this and more.
For further tax guidance and to ensure you’re not paying more tax than you need to, it’s wise to speak to an expert. A financial advisor can help you handle all your tax queries and ensure you’re not paying more tax than needed.
Senior Content Writer
Rachel is a Senior Content Writer at Unbiased. She has nearly a decade of experience writing and producing content across a range of different sectors.