Alabama for retirees: pensions and Social Security untaxed, IRAs and 401(k)s at 5% after $6,000

Two Alabama retirees with the same $60,000 of income can owe the state nothing or more than $1,500, and the difference is the name on the plan. If the money comes from Social Security, a military or government pension, or a private employer’s defined benefit pension, Alabama does not tax a dollar of it at any age or any income. If it comes from a 401(k), 403(b), 457 plan, IRA, SEP or SIMPLE, or a Roth conversion, Alabama taxes it as ordinary income, and the only break is $6,000 a year per person once you are 65, claimed on Schedule RS. The deduction for federal income tax on Form 40 line 12 softens the bill, since every dollar of federal tax on the withdrawal comes off the Alabama return. The $6,000 is still $6,000 for 2026; the bill to double it passed the House and died in the Senate in 2025, and was not revived.

Everything else a retiree earns is taxed the usual Alabama way: interest, dividends, capital gains at the ordinary rates, rent, and the wages of anyone still working. The rest of the return, the shrinking standard deduction, the federal tax deduction and the 2%, 4% and 5% brackets, is in How Alabama income tax works. This article is about the lines a retiree fills in.

What Alabama does not tax

The Form 40 instructions carry a list headed “income you do not report.” For retirees the entries that matter are these, and none of them has an age or income test:

A defined benefit plan promises a monthly benefit figured from salary and years of service. A plan that holds a balance in your name, however it pays out, is a defined contribution plan and is taxable. When in doubt, the plan administrator can say which it is.

Exempt distributions still go on Schedule RS, in the section for distributions exempt from Alabama income, with the reason for the exemption, so the Department can match them to the 1099-Rs. Leaving them off the schedule invites a letter; putting them in the taxable section costs 5%.

What Alabama taxes, and the $6,000 exclusion

Distributions from defined contribution plans and IRAs are reported on Schedule RS and flow to page 2 of Form 40. The taxable amount is generally the federal taxable amount from box 2a of the 1099-R. Then comes the exclusion: a taxpayer who is 65 or older by December 31 and has taxable retirement income may exclude up to $6,000 of it. The exclusion is per person and is limited to that person’s own distributions. A couple both 65 excludes up to $12,000, but a husband with $30,000 of IRA withdrawals and a wife with none excludes $6,000, not $12,000. A spouse under 65 gets nothing until the year he or she turns 65. Schedule RS asks the age question separately for each spouse and does the arithmetic in Parts II and III.

The exclusion applies to the taxable part of a distribution from a 401(k), 403(b), 457, IRA, SEP, SIMPLE, or a nonqualified annuity that is not a defined benefit pension. It does not apply to interest, dividends, gains or wages. At the 5% rate it is worth up to $300 a person, $600 a couple.

Roth conversions

A Roth conversion is a distribution from a traditional IRA, and Alabama taxes it like any other IRA distribution: the converted amount is Alabama income, the $6,000 exclusion can be applied against it at 65, and the rest is taxed at the regular rates. Qualified Roth withdrawals later are not income, federally or in Alabama. Two Alabama features change the arithmetic of a conversion compared with the headline 5%. The federal tax on the conversion is deductible on line 12, so a conversion taxed at 12% federally is taxed by Alabama on 88% of itself, about 4.4%; one taxed at 22% federally costs Alabama about 3.9%. And a large conversion pushes Alabama AGI past $35,500, where the joint standard deduction has fallen from $8,500 to $5,000, which adds $175 to the bill. The worked example below puts numbers on a $50,000 conversion.

The federal side of a conversion is the larger one: more Social Security becomes taxable, the $6,000 federal senior deduction shrinks once modified AGI passes $150,000 joint, and Medicare premiums two years later can rise through IRMAA. None of that is Alabama’s doing, but a conversion planned around the Alabama 5% should be planned around those first.

The federal senior deduction, and why it raises Alabama tax

The federal $6,000 deduction for each person 65 or older, in effect for 2025 through 2028, is not part of Alabama law. The Department of Revenue’s analysis of the 2025 federal law lists it as “tied to federal: no,” and there is no line for it on Form 40. It does reach the Alabama return in one indirect way. It lowers your federal income tax, and your federal income tax is an Alabama deduction, so a smaller federal bill means a smaller line 12 and a slightly larger Alabama bill: about 5% of the federal saving. A couple whose senior deductions cut federal tax by $1,440 pays Alabama $72 more. The same is true of the extra standard deduction for age and of any other federal break. Alabama’s own age-65 provision is the $6,000 retirement exclusion, and it is a different thing: it applies to taxable retirement distributions only, not to wages or interest, and it does nothing for a retiree whose income is all Social Security and pension, who already owes Alabama nothing.

Withholding and estimated payments

Pension payers generally will not withhold Alabama tax, and need not, since the income is exempt. IRA custodians and 401(k) administrators will withhold Alabama tax if asked, and Schedule RS has a column for it that carries to the withholding total. A retiree who expects to owe at least $500 of Alabama tax after withholding must make estimated payments on Form 40ES, due April 15, June 15 and September 15, 2026 and January 15, 2027, or meet the safe harbor: payments of at least 90% of this year’s tax or 100% of last year’s, 110% if last year’s Alabama AGI was over $150,000. The couple in the example owes $377 and needs no estimates; with the conversion they owe $2,752 and do. Having the IRA custodian withhold 5% of each distribution is the simplest cure.

Property tax relief: the homestead exemptions

Alabama property tax is low to begin with. An owner-occupied home is assessed at 10% of market value and the state levy is 6.5 mills, so the state’s share on a $300,000 house is under $200 and the county and school levies make up the rest. At 65 the state share disappears for everyone, and the county share can too, depending on income. The exemptions are claimed once at the county revenue commissioner or tax assessor, not on Form 40, and cover the house and up to 160 acres.

The $12,000 lines are statutory and have not moved in decades. The Department’s page states the income test for the 65-and-over county exemptions in more than one way, and a couple with a pension of $20,000 and Social Security may or may not qualify depending on which return the county looks at. Ask the county. Eighteen counties voted on November 3, 2026 on local amendments creating a senior property tax exemption for owners 65 or older who have lived in the home at least five years. Morgan, Limestone and Cullman are among those reported approved. It can first be claimed October 1, 2027, in writing with the county revenue commissioner between October 1 and December 31 (ask the county which passed).

Because the homestead exemptions key off income on a tax return, and Alabama AGI leaves out Social Security and pensions, a retiree whose only taxable item is a small IRA withdrawal can have Alabama AGI under $12,000 while living comfortably. That is how H-2 is written, and it is worth checking at the county office the year you turn 65.

Moving in, moving out

Federal law bars a state from taxing the retirement income of someone who no longer lives there, so a pension earned elsewhere and paid to a new Alabama resident is Alabama’s to tax, and if it is a defined benefit pension Alabama declines. An IRA built elsewhere is taxable here from the day you become a resident, less the $6,000 at 65. In the year of a move, Form 40 reports the distributions received while an Alabama resident and the federal tax deduction is prorated by Alabama AGI over federal AGI; the mechanics are in Moving to Alabama. For someone deciding between a Roth conversion before or after a move, the comparison is the other state’s treatment of IRA distributions against Alabama’s 5% less the federal tax deduction.