Go to Retiree Tax Map Alabama Add to State Compare List | View List View State Compare List (0) selected | Compare up to 5 The Bottom Line Most Tax-Friendly If you’re a college football fan, perhaps you’ve thought about retiring to Alabama. But there are also non-football reasons to spend your golden years in the Camellia State—like low taxes for retirees. While most people end up paying the highest income tax rate, it’s not too bad at only 5%. Plus, Social Security benefits and payments from traditional pension plans (i.e., defined benefit plans) are exempt. There’s no tax on income from federal government, certain Alabama state and local government, or military retirement plans, either.Alabama also boasts the second-lowest property taxes in the the country. Plus, all homeowners age 65 or older are exempt from state property taxes. Seniors with net taxable income of $12,000 or less on their combined (taxpayer and spouse) federal income tax return are exempt from all property taxes on their principal residence.But Alabama fumbles when it comes to sales taxes. At 4%, the state rate is low, but some local governments tack on up to 7% in additional sales taxes. As a result, the state-wide average combined (state and local) sales tax rate is 9.16%, which is the fifth-highest in the nation. State Sales Tax 4% state levy. Localities can add as much as 7% to that, and the average combined rate is 9.16%, according to the Tax Foundation. Alabama is one of the few states that does not exempt groceries from sales taxes. Income Tax Range Low: 2% (on up to $1,000 of taxable income for married joint filers and up to $500 for all others)High: 5% (on more than $6,000 of taxable income for married joint filers and more than $3,000 for all others)Effective tax rate: 4.84% for single filers, 4.93% for joint filers.Alabama also allows residents to deduct all of their federal income tax from state taxable income. Some counties and cities charge an “municipal occupational tax” of 0.5%-2% on earned income; the average levy is 0.5%, according to the Tax Foundation. Social Security Benefits are not taxed. Exemptions for Other Retirement Income Income from federal government, designated Alabama state and local government, and military retirement plans is exempt.In addition, payments from traditional pension plans (i.e., defined benefit plans) are exempt, whether they are from private sector or out-of-state government plans.Railroad Retirement benefits are also exempt. Property Taxes In Alabama, residents pay an average of $432 in taxes per $100,000 of assessed home value.Tax breaks for seniors: All homeowners 65 or older are exempt from the state portion of property taxes. Taxpayers age 65 and older with net taxable income of $12,000 or less on the combined (taxpayer and spouse) federal income tax return are exempt from all property taxes on their principal residence. Vehicle Taxes Car sales are taxed at 2% by the state (half of the general tax), and municipalities can add to that, with the maximum local levy at 5.25%. Most vehicles are subject to an annual property tax, with rates set by municipality. The levy applies even to vehicles not used on the road.In Shelby County, for example, the tax on a private passenger vehicle valued at $16,800 would be approximately $124 per year. Inheritance and Estate Taxes None.