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 Tax-Friendly The Yellowhammer State is tax-friendly to retirees. Most pensions and Social Security are exempt from state income taxes. Homeowners 65 and older don't pay state property taxes, and can qualify for breaks on county and local property taxes as well. A catch: Sales taxes are high, and even apply to food. State Sales Tax 4% state levy. Localities can add as much as 7.5% to that, and the average combined rate is 9.1%, according to the Tax Foundation. Alabama is one of the few states that does not exempt food from its state sales tax. 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)Alabama also allows residents to deduct all of their federal income tax from state taxable income.Effective income tax rate: 4.9%/individual, 4.9%/joint Social Security Benefits are not taxed. Exemptions for Other Retirement Income Military, civil-service, state and local government, and qualified private pensions are exempt. Out-of-state government pensions are tax-exempt if they are defined-benefit plans. Railroad Retirement benefits are exempt. Distributions from IRAs and employer-based defined-contribution plans, such as 401(k)s and 403(b) plans, are taxable.IRAsTaxable at ordinary income tax rate.401(k)s and Other Defined-Contribution Employer Retirement PlansTaxable at ordinary income tax rate (up to 5%).Private PensionsQualified private pensions are exempt.Public PensionsMilitary, civil-service, and state and local government pensions are exempt. Out-of-state government pensions are tax-exempt if they are defined-benefit plans. Railroad Retirement benefits are exempt. Property Taxes The median property tax on Alabama's median home value of $128,500 is $550Tax 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 There is no inheritance tax or estate tax.