Alabama taxes for early retirees: tax-free pensions, taxed IRAs and a 1935 rate table

By Tom, CPA · Updated October 29, 2026

TL;DR: Alabama doesn't tax Social Security or most defined-benefit pensions, but 401(k) and IRA withdrawals are taxable, with only a $6,000-per-person exclusion starting at age 65. The rate tops out at 5% on taxable income over $3,000 (single) or $6,000 (joint), and you can deduct the federal income tax you paid.

Educational only, not tax, legal, or investment advice. Examples are illustrations, not predictions. Rules and limits change; verify current figures and talk to a qualified professional about your situation.

Alabama's income tax rate table was written in 1935, and the state has been too polite to update it. The top rate of 5% applies to every dollar of single taxable income over $3,000. That's not a typo: three thousand dollars, the price of a decent riding mower. In practice, Alabama is a flat 5% tax with a tiny decorative staircase at the bottom.

Here's the twist that makes it interesting for retirees: Alabama is wildly generous to some retirement income and stingy with the rest. If your money comes from a defined-benefit pension, Social Security or the military, Alabama mostly waves you through. If your money comes from the 401(k) and IRA you spent twenty years stuffing like a Thanksgiving turkey, Alabama would like a word. Let's meet Pension Pam and 401(k) Kevin, two retirees who moved to the same street and got very different tax bills.

CPA Warning Label: Alabama's generosity is aimed at pensions, not 401(k)s. A FIRE retiree living on IRA withdrawals before 65 gets no retirement exclusion at all, and the 5% rate kicks in almost immediately.

Income tax rates: a staircase with three steps

The Alabama Department of Revenue lists these rates, which have applied for decades:

These figures are on ALDOR's income tax FAQ and in the 2025 Form 40 booklet; the 2026 forms weren't out as of October 29, 2026, but the brackets aren't indexed and haven't moved in generations. The practical upshot: almost any retiree with real taxable income pays 5% at the margin. On a joint return, the first $6,000 of taxable income costs $220 in tax ($20 at 2% plus $200 at 4%), and every dollar after that costs a nickel.

Local note: some Alabama cities and counties levy occupational taxes on wages, but those hit paychecks, not IRA withdrawals, so a fully retired person generally doesn't care.

What Alabama taxes: the pension club vs. the 401(k) crowd

Alabama's administrative code (Rule 810-3-19-.01) lists retirement income that's fully exempt. The list includes:

• Social Security benefits, in full.
• Alabama Teachers', Employees' and Judicial Retirement System benefits.
• Federal civil service retirement (including TVA's pension system) and other U.S. government retirement funds.
• Railroad Retirement Act benefits, tier one and tier two.
• Military retirement.
• Certain Alabama police and firefighter pensions.

Rule 810-3-19-.04 extends the exemption to benefits from qualified defined benefit plans, which is how many private-employer pensions qualify too. Confirm with your plan administrator that your plan really is a defined benefit plan; hybrid and cash-balance arrangements are where people get surprised.

Now the other side of the street. Distributions from a 401(k), 403(b), IRA or other defined contribution plan are taxable in Alabama. So are interest, dividends and capital gains, which Alabama taxes as ordinary income at the same rates. There's no special capital gain rate.

Roth accounts: qualified Roth distributions that aren't federally taxable aren't reported as taxable retirement income on Schedule RS. A Roth conversion, on the other hand, creates a taxable IRA distribution, and Alabama will tax it at up to 5%.

The $6,000 retirement exclusion: a birthday present delivered at 65

Since 2022, Schedule RS has a retirement income exclusion. If you're 65 or older and have taxable retirement income, you can exclude up to $6,000 of it, limited to the retirement income actually taxable to Alabama. On a joint return, each spouse figures their own exclusion, so a couple who are both 65+ and both have taxable retirement income can exclude up to $12,000.

For the FIRE crowd, the important word is "65." A 52-year-old living on IRA withdrawals gets zero exclusion. The 401(k) is taxed in full until the birthday cake shows up. And because the exclusion is per person and capped by that person's own taxable retirement income, you can't put all the IRA money in one spouse's name and claim $12,000 against it.

Deductions, exemptions and the deduction for federal tax

Alabama's standard deduction is set by a chart in the Form 40 booklet and shrinks as income rises. For 2025:

The personal exemption is $1,500 for single filers and $3,000 for married filing jointly or head of family. Neither is indexed for inflation.

Then comes the weird one. Alabama lets you deduct the federal income tax you paid or accrued, under rules in Rule 810-3-15. Alabama is unusual in allowing a full deduction for federal income tax. For a retiree doing big Roth conversions, this is a genuine consolation prize: a higher federal bill shrinks the Alabama bill a bit. Every $1,000 of federal tax saves up to $50 of Alabama tax.

Illustration: Pension Pam vs. 401(k) Kevin

Illustration (tax year 2025 rules; assumptions are hypothetical): Kevin and his wife are both 66 and file jointly. Kevin withdraws $30,000 from his IRA, his wife withdraws $20,000 from hers, they collect $40,000 of Social Security, and they have $5,000 of dividends. Assume they paid $3,000 of federal income tax.

• Social Security: exempt, $0 taxable.
• IRA withdrawals: $30,000 minus a $6,000 exclusion = $24,000; $20,000 minus $6,000 = $14,000. Total $38,000.
• Alabama income: $38,000 + $5,000 dividends = $43,000.
• Less standard deduction ($5,000 at this income), personal exemption ($3,000) and federal tax deduction ($3,000): $43,000 - $11,000 = $32,000 taxable.
• Tax: $20 (2% of $1,000) + $200 (4% of $5,000) + $1,300 (5% of $26,000) = $1,520.

Pam and her husband have the same $90,000 of total income, but their $50,000 comes from a qualified defined benefit pension instead of IRAs. Their taxable Alabama income is the $5,000 of dividends, which is less than their $8,500 standard deduction plus $3,000 exemption (their Alabama income is under $26,000, so they get the maximum). Alabama tax: $0. Same street, same income, one couple pays $1,520 and the other pays nothing. (The official tax tables round slightly differently; the method is the point.)

Now rewind Kevin to age 55. No $12,000 of exclusions, so his taxable income rises by $12,000 and his Alabama tax rises by $600, to about $2,120. That's the price of retiring early with a 401(k) instead of a pension.

Property tax: famously low, and lower at 65

Alabama property taxes are among the lowest in the country, and millage rates are modest in most places. Your exact bill depends on your county and city, so check the local revenue commissioner or tax assessor before you buy.

For retirees, the big perk is the homestead exemption for those 65 and older. ALDOR explains that homeowners 65 or older are exempt from the state portion of property tax on their homestead. Additional exemptions are available for lower-income seniors, and some counties go further. You must apply with your county; it isn't automatic.

Sales tax, estate tax and the other costs of living

Alabama's state sales tax is 4% (the Form 40 booklet's use tax worksheet lists the 4% general rate), and local sales taxes stack on top. Combined rates in many cities run well above the state rate, so your sales tax burden depends heavily on where you shop. For a retiree spending most of their budget on taxable goods, sales tax can rival the income tax.

Estate and inheritance tax: Alabama has neither. Federal estate and gift rules still apply.

Residency and estimated payments

If you move to Alabama mid-year, you file a part-year resident return (Form 40NR) and Alabama taxes income received while you were a resident. IRA custodians generally don't withhold Alabama tax unless you ask, so retirees living on distributions usually either request withholding or make estimated payments using Form 40ES, with quarterly due dates that generally line up with the federal ones. If you move out of a state with a sticky residency test, the old state may still try to claim you; document the move.

Moving is a two-state tax event, not a one-state one. Before you load the truck, read how to change your state residency without your old state following you, check how the federal Social Security tax torpedo interacts with your withdrawals, and run your numbers through the state tax move calculator.