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, but some cities and counties apply their own property levies. The only catch: Sales taxes are high, and even apply to food. State Sales Tax 4% state levy. Localities can add as much as 7% to that, and the average combined rate is 9.01%, according to the Tax Foundation. Alabama is one of the few states that does not exempt food from 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 (up to 5%).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 $125,500 is $543.Tax breaks for seniors: Homeowners 65 and older are exempt from all state property taxes. Some cities assess separate property taxes. Seniors age 65 and older with taxable income of $12,000 or less on their federal return may qualify for an exemption from county and city taxes with no maximum amount. Seniors age 65 and older with taxable income of more than $12,000 on their federal return but less than $12,000 adjusted gross income on their state return qualify for an exemption of $5,000 of assessed value from their county taxes. Seniors who don't meet the above income limitations may qualify for a county homestead exemption worth no more than $2,000. 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.