Does Alabama Tax Social Security and Retirement Income?

Social Security is not taxed

Alabama lists federal Social Security benefits among the kinds of income that are not reported on its return. The exemption has no income limit and no age test: the part of a benefit that is taxable on the federal Form 1040 is simply left off Form 40. Federal Railroad Retirement benefits are treated the same way. (Alabama Department of Revenue, Form 40 Booklet (2025): income not reported, Schedule RS and IRA rules, standard deduction chart, federal income tax deduction worksheet, tax tables, domicile and part-year rules)

Benefits are also left out when deciding whether a return has to be filed, and they are not part of Alabama adjusted gross income, the figure that sets the size of the standard deduction. A retired couple living on Social Security and a defined benefit pension can have no Alabama taxable income at all. (Alabama Department of Revenue, Form 40 Booklet (2025): income not reported, Schedule RS and IRA rules, standard deduction chart, federal income tax deduction worksheet, tax tables, domicile and part-year rules)

The federal government is a separate matter. Up to 85% of a benefit can be taxed on a federal return once other income passes fixed thresholds, wherever you live. Our taxable Social Security calculator shows how much of yours is counted.

Defined benefit pensions, public or private, are exempt; defined contribution plans are not

The Form 40 instructions name the retirement income Alabama does not tax: benefits from the Alabama Teachers’, Employees’ and Judicial Retirement Systems, federal Civil Service and other U.S. government retirement systems, military retirement pay, the Tennessee Valley Authority pension system, eligible Alabama firefighters’ and peace officers’ pensions, and payments from any defined benefit retirement plan under Internal Revenue Code section 414(j). These amounts go in Part I of Schedule RS and never reach taxable income. (Alabama Department of Revenue, Form 40 Booklet (2025): income not reported, Schedule RS and IRA rules, standard deduction chart, federal income tax deduction worksheet, tax tables, domicile and part-year rules)

The defined benefit rule is what covers private-sector pensions. The Department of Revenue’s regulation treats any plan that is not a defined contribution plan as a defined benefit plan: one where contributions are actuarially calculated to pay a promised benefit, as opposed to an individual account whose value depends on contributions and investment results. Payments from such a plan are exempt to the extent they are taxable federally. Nonqualified defined benefit arrangements, such as excess benefit plans and supplemental executive retirement plans, are covered as well. (Alabama Administrative Code Rule 810-3-19-.04, Defined Benefit Plans)

The same regulation says profit-sharing, stock bonus and money purchase plans are defined contribution plans, and that not every plan called a pension or annuity is a defined benefit plan. The instructions tell retirees to ask the plan administrator whether a plan qualifies. Where one employer pays benefits from a combination of plans, only the amount actually distributed from the defined benefit plan is exempt. (Alabama Administrative Code Rule 810-3-19-.04, Defined Benefit Plans)

IRA and 401(k) withdrawals are taxable after a $6,000 exclusion per person from age 65

Distributions from traditional IRAs, SEPs, Keogh plans and 401(k) and 403(b) accounts are taxable and are reported on Schedule RS, Part II for the primary taxpayer and Part III for a spouse. Where the federal and Alabama cost basis differ, for example because contributions were made before Alabama allowed a deduction, a worksheet in the instructions works out the smaller Alabama taxable amount. (Alabama Department of Revenue, Form 40 Booklet (2025): income not reported, Schedule RS and IRA rules, standard deduction chart, federal income tax deduction worksheet, tax tables, domicile and part-year rules)

Each taxpayer who is 65 or older can exclude up to $6,000 of the retirement income that would otherwise be taxable to Alabama. The exclusion is claimed separately for each spouse on line 10 of that spouse’s part of Schedule RS and cannot exceed that person’s own taxable distributions, so a spouse with no IRA or 401(k) income has nothing to exclude. The $6,000 figure is from the 2025 Schedule RS, the latest issued; the 2026 schedule had not been published on the review date. (Alabama Department of Revenue, Schedule RS (2025), Retirement Schedule: line 10 retirement exclusion)

A Roth conversion is taxable. The instructions say the taxable portion is the amount that would have been included in income had the money been withdrawn and not converted, less any return of basis, and that it is reported on Schedule RS with other IRA distributions. Alabama has recognized Roth IRAs since 1998 and applies the federal restrictions and limits to them. (Alabama Department of Revenue, Form 40 Booklet (2025): income not reported, Schedule RS and IRA rules, standard deduction chart, federal income tax deduction worksheet, tax tables, domicile and part-year rules)

A lump sum rolled over from a defined benefit plan into an IRA keeps part of its exempt character. Under the regulation the amount rolled over is not taxed and becomes basis in the new account; only the later earnings are taxable, worked out pro rata as distributions are taken. (Alabama Administrative Code Rule 810-3-19-.04, Defined Benefit Plans)

To size a conversion against federal brackets and Medicare surcharges, see the Roth conversion calculator; for required withdrawals, the RMD calculator.

Interest, dividends and capital gains are taxed at the ordinary rates

Alabama has one rate schedule. Dividends and interest are reported on Schedule B and gains from selling stocks, bonds, real estate and other assets on Schedule D, and they are taxed with everything else at 2% to 5%. A gain on the sale of a home is taxable to the same extent as on the federal return, and a loss on a personal residence is not deductible. (Alabama Department of Revenue, Form 40 Booklet (2025): income not reported, Schedule RS and IRA rules, standard deduction chart, federal income tax deduction worksheet, tax tables, domicile and part-year rules)

Interest on obligations of the United States and its possessions is exempt, as is interest on obligations of the State of Alabama and its counties and municipalities, including the share of a mutual fund’s dividends that comes from them. All other interest is taxable, which includes bonds of other states and Fannie Mae, Ginnie Mae and Freddie Mac securities. From 2025 net capital gains on the exchange of precious metal bullion are exempt. (Alabama Department of Revenue, Form 40 Booklet (2025): income not reported, Schedule RS and IRA rules, standard deduction chart, federal income tax deduction worksheet, tax tables, domicile and part-year rules)

The rates are 2% on the first $500 of taxable income, 4% on the next $2,500 and 5% above $3,000 for single filers, heads of family and married people filing separately. Married couples filing jointly pay 2% on the first $1,000, 4% on the next $5,000 and 5% above $6,000. The Department of Revenue’s 2026 withholding formula uses these rates, a personal exemption of $1,500 (single) or $3,000 (joint), and the same standard deduction as the 2025 return. (Alabama Department of Revenue, Withholding Tax Tables and Instructions for Employers and Withholding Agents (revised January 2026): rates, standard deduction and personal exemptions)

The standard deduction depends on Alabama adjusted gross income, which excludes Social Security and exempt pensions. A joint return gets $8,500 when that figure is under $26,000, losing $175 for each $500 above until it settles at $5,000 from $35,500. A single filer gets $3,000, falling by $25 per $500 to $2,500. The chart has no additional amount for age 65. Filers may itemize on Schedule A instead. (Alabama Department of Revenue, Form 40 Booklet (2025): income not reported, Schedule RS and IRA rules, standard deduction chart, federal income tax deduction worksheet, tax tables, domicile and part-year rules)

Alabama lets residents deduct their federal income tax. The worksheet starts with the tax on line 22 of federal Form 1040, adds any net investment income tax from Form 8960 and subtracts refundable credits; the result goes on Form 40, line 12. A full-year resident deducts the whole amount even when much of the federal tax arises from Social Security or pension income that Alabama exempts. The examples on this page compute the 2026 federal tax from the federal rate schedules, including the extra standard deduction and the $6,000 senior deduction for people 65 or older. (Alabama Department of Revenue, Form 40 Booklet (2025): income not reported, Schedule RS and IRA rules, standard deduction chart, federal income tax deduction worksheet, tax tables, domicile and part-year rules)

The tax itself is read from a table. Below $100,000 of taxable income the table moves in $100 bands and gives the tax at the middle of each band; from $100,000 a worksheet adds 5% of the excess to $4,918 for joint filers or $4,958 for others. The results differ from the bracket arithmetic by a dollar or two. (Alabama Department of Revenue, Form 40 Booklet (2025): income not reported, Schedule RS and IRA rules, standard deduction chart, federal income tax deduction worksheet, tax tables, domicile and part-year rules)

Retirement exclusion: up to $6,000 a year of taxable retirement income, such as IRA and 401(k) withdrawals, for each taxpayer aged 65 or older, limited to that person’s own taxable distributions. (Alabama Department of Revenue, Schedule RS (2025), Retirement Schedule: line 10 retirement exclusion)

Exempt at any age and any income: Social Security, Railroad Retirement, military retirement pay, federal and Alabama state government pensions and payments from defined benefit plans. (Alabama Department of Revenue, Form 40 Booklet (2025): income not reported, Schedule RS and IRA rules, standard deduction chart, federal income tax deduction worksheet, tax tables, domicile and part-year rules)

Itemized deductions: medical and dental expenses above 4% of Alabama adjusted gross income are deductible, and qualified long-term care insurance premiums are deductible in full on a separate line. (Alabama Department of Revenue, Form 40 Booklet (2025): income not reported, Schedule RS and IRA rules, standard deduction chart, federal income tax deduction worksheet, tax tables, domicile and part-year rules)

Property tax: homeowners 65 or older are exempt from the state portion of property tax on their homestead with no income limit, and from all property tax when federal taxable income is $12,000 or less. (Alabama Department of Revenue: Homestead Exemptions)

The same three households appear on every state page, so the figures can be compared across states. Each is a full-year resident taking the standard deduction, with no dependents. The figures are state income tax only: any county, city or school district income tax is described on this page but not added in. Pension income is from a private employer, and IRA figures are taxable withdrawals from traditional accounts. The state tax is our calculation from Alabama's published 2026 rules; it is an illustration, not a return.

These households also owe federal income tax, which is the same wherever they live. The tax bracket calculator and the guide to taxes in retirement cover that side.

Alabama’s property taxes are low by any national measure. As a comparative figure, the Tax Foundation’s 2026 report, using 2024 Census data, puts the effective rate on owner-occupied homes at 0.37% of value, 49th among the states. On a $400,000 home that is about $1,480 a year, with bills higher in cities and lower in rural counties. (Tax Foundation, Property Taxes by State and County, 2026 (comparative figures from Census ACS data))

An owner-occupied home is Class III property, taxed on 10% of its appraised market value. The state levies 6.5 mills on that assessed value, and counties, cities and school districts add their own millage. A $400,000 home is assessed at $40,000, so the state portion comes to $260 before any exemption. Private cars and pickup trucks are Class IV property, assessed at 15%. (Alabama Department of Revenue: Property (Ad Valorem) Tax (classes, assessment ratios, state millage))

Homestead exemptions are applied for at the county office and apply to a single-family, owner-occupied home and up to 160 acres. Owners under 65 are exempt on up to $4,000 of assessed value for state tax and $2,000 for county tax. From 65 the state portion is removed entirely, and how much county, school and city tax remains depends on income. (Alabama Department of Revenue: Homestead Exemptions)

Since the tax year that began October 1, 2025, Act 2024-344 limits the yearly increase in the taxable assessed value of Class II and Class III property to 7%. The cap does not apply after a change of ownership (other than transfers between spouses or family members for nominal consideration), to new construction or to significant improvements, and it runs through the fiscal year beginning October 1, 2027. (Alabama Department of Revenue: 7% Cap Information, HB73 (Act 2024-344))

The state sales tax is 4% on general merchandise, 2% on automobiles and 2% on food and groceries. Counties and municipalities levy their own sales taxes on top, and the rates vary from place to place; the Department of Revenue publishes a lookup by address. Prescription drugs are exempt. (Alabama Department of Revenue: Sales and Use Tax Rates)

Local rates are high. As a comparative figure, the Tax Foundation puts Alabama’s average local rate at 5.46% and the combined average at 9.46% as of January 1, 2026, fifth-highest in the country. A retiree who pays little or no Alabama income tax will usually find sales tax is the largest state and local tax in the household budget. (Tax Foundation, State and Local Sales Tax Rates, 2026 (comparative figures))

Groceries are taxed, but at a falling state rate. The state rate on food went from 4% to 3% on September 1, 2023 and to 2% on September 1, 2025 under Act 2025-305. County and city taxes on food continue at their own rates, though the same act lets local governments reduce them. (Alabama Legislature, HB386 (2025 Regular Session), enrolled as Act 2025-305: state sales and use tax on food)

For two months in 2026 the state portion was removed altogether: Act 2026-604 suspended the state sales and use tax on food from May 1 through June 30, 2026. City and county taxes on food were not affected, and retailers kept collecting them through the suspension. (Alabama Department of Revenue: Notice, Temporary Suspension of State Sales and Use Tax on Food (Act 2026-604))

Alabama collects no estate or inheritance tax. Its estate tax was tied to the federal credit for state death taxes, which federal law phased out, and the Department of Revenue states that estates of people who died after December 31, 2004 are not required to file with Alabama. The size of an estate and the relationship of the heirs therefore make no difference to Alabama tax. (Alabama Department of Revenue: Alabama Fiduciary, Estate, and Inheritance Tax)

The federal estate tax applies in every state. The estate tax calculator estimates both the federal tax and any state tax.

The state sales tax on groceries fell to 2% on September 1, 2025 under Act 2025-305, which also removed the earlier limits on how far counties and cities may cut their own food taxes. (Alabama Legislature, HB386 (2025 Regular Session), enrolled as Act 2025-305: state sales and use tax on food)

Act 2026-604 suspended the state tax on food for May and June 2026 only. The suspension was limited to those two months and left local food taxes in place. (Alabama Department of Revenue: Notice, Temporary Suspension of State Sales and Use Tax on Food (Act 2026-604))

The same act created an income tax deduction for the premium portion of overtime pay, up to $1,000 per taxpayer per year, for tax years 2026 through 2028. It is available whether or not the taxpayer itemizes and matters to retirees who still work hourly jobs. (Alabama Department of Revenue: Overtime Premium Deduction (Act 2026-604))

The 7% cap on annual increases in taxable assessed value took effect for tax collections beginning October 1, 2025, using October 1, 2024 as the base year, and continues through the fiscal year beginning October 1, 2027. (Alabama Department of Revenue: 7% Cap Information, HB73 (Act 2024-344))

The income tax rates, standard deduction amounts and $1,500 and $3,000 personal exemptions in the Department of Revenue’s January 2026 withholding booklet are the same as those on the 2025 return. (Alabama Department of Revenue, Withholding Tax Tables and Instructions for Employers and Withholding Agents (revised January 2026): rates, standard deduction and personal exemptions)

Alabama taxes people who are domiciled in the state on all their income wherever it is earned, regardless of how much time they spend there. Domicile is where a person lives, has a permanent home and intends to return when away. Each person has only one, and it continues until a new one is established and the old one abandoned. The burden of proving a change is on the taxpayer, even one who no longer owns property or earns income in Alabama. (Alabama Department of Revenue, Form 40 Booklet (2025): income not reported, Schedule RS and IRA rules, standard deduction chart, federal income tax deduction worksheet, tax tables, domicile and part-year rules)

Part-year residents file Form 40 and report only the income received while living in Alabama. They keep the full standard deduction and personal exemption, but the federal income tax deduction is prorated by the ratio of Alabama adjusted gross income to federal adjusted gross income. Someone who also has Alabama-source income while a nonresident files Form 40NR for that period. (Alabama Department of Revenue, Form 40 Booklet (2025): income not reported, Schedule RS and IRA rules, standard deduction chart, federal income tax deduction worksheet, tax tables, domicile and part-year rules)

Federal law prevents any state from taxing the retirement income of a person who is not its resident or domiciliary. A retiree who moves to Alabama owes nothing to the former state on pension, 401(k) or IRA payments received after the move, and one who leaves Alabama stops owing Alabama tax on IRA withdrawals. (4 U.S.C. 114, Limitation on State income taxation of certain pension income)