Alabama Tax Laws for Retirement & Social Security

Different states with state income tax have varying provisions about how different types of retirement pay is taxed. Tax provisions can depend on the exact source of that income and the recipient's age and whether he or she is disabled.

Understanding Alabama Retirement Taxes

Alabama exempts many categories of retirement pay from income tax, regardless of your normal Alabama income tax rate. These include pensions from the federal government, pensions from the military, pensions offered through various Alabama state and local retirement plans and even traditional defined benefit plans from private employers.

Federal Social Security and railroad retirement benefits are also exempt from Alabama state income tax, as are other categories of payments including unemployment, child support, severance pay up to $25,000 and welfare benefits. Some of these payments may still be subject to federal tax, and if you work in Alabama but live in another state, you may owe tax to that state as well.

Alabama retirees who are over age 65 can also enjoy another tax benefit: state taxes on property are waived for people who are over 65, permanently and totally disabled or blind. Some counties may still tax senior citizens, however, so it's best to check with your Alabama county to see if you owe any property taxes.

When You May Still Owe Tax

While pension and Social Security pay is exempt from Alabama state income tax, you can receive such pay and still be required to file and pay Alabama taxes.

While pensions are tax exempt, distributions from IRAs, 401(k)s and similar defined contribution plans are taxable. Additionally, if you have investment income while living in Alabama or work one job while receiving a pension from another, that income can be taxed normally in Alabama, even if you are retired.

Generally, the Alabama state tax rate on income is 2 percent on the first $500 of income, 4 percent on the next $3,000 and 5 percent of all income beyond that point for single people, married people filing singly and heads of households. For married couples filing jointly, the thresholds are doubled, so you pay 2 percent on the first $1,000 of income, 4 percent on the next $6,000 and 5 percent on all income beyond that point.