State Taxes at a Glance – Alabama
|Type of Tax||2022|
|Individual Rates||2.00% to 5.00%|
|Corporate / Business Tax Rates||7.75%|
|Gross Receipts Tax||None|
|Property Taxes||1.76% as a percentage of primary home|
|Sales Tax||6.35% (average)|
|Estate or Inheritance Tax||Yes|
Alabama State Income Tax Rate
Alabama’s State Income Tax Rate is calculated on a marginal scale. That means that it has different brackets that range from 2.00% to 5.00% for 2021. Alabama’s tax brackets are:
- 2% anything greater than Zero
- 4% anything greater than $500
- 5% anything greater than $3,000
Alabama’s income tax rate went up in 2021. The highest bracket of 5.00% is an increase from 4.00% in 2020.
Local City Tax
Alabama also has a local income tax that is imposed by city or county. On average the Local Tax is 0.12% of Adjusted Gross Income.
State Business Taxes in Alabama
The state of Alabama has a flat Corporate Tax rate of 6.50%. For other business entities that are flow-thru entities, such as S Corporations, Partnerships, LLCs, etc., they are taxed the individual income tax rates between 2.00% to 5.00%.
Federal Income Tax Deduction
The state of Alabama is one of the few states in the union that allows you a deduction for paying the IRS. Certain amendments filed as part of the Alabama Constitution allow individuals and corporations to deduct the amount of Federal Income Tax Paid from their Gross Receipts:
- Amendment 225 – Individual taxpayers are allowed to deduct Federal Income Tax Paid form their individual gross income
- Amendment 662 – Corporate taxpayers are allowed to deduct full apportioned amount of Federal Income Tax Paid
Please check with your CPA to make sure you claim the deduction correctly. Here is a link to Alabama Department of Revenue website with more information on this deduction.
Sales and Property Taxes in Alabama
Sales Tax – Like many states, Alabama has multiple tax rates. One at the state level and another at the local level. The state rate is 4.00% the average local rate is 5.24% (total average tax rate for Alabama Sales Tax is 9.24%).
Property Taxes in Alabama – the average property tax rate for residential property in the state of Alabama is 0.39%, making it almost the lowest effective property tax rate in the country (just behind Hawaii which has the lowest).
Privilege Tax in Alabama
The state of Alabama has a Capital Stock Tax referred to as Privilege Tax. The Privilege tax is based on the net worth of your business times 0.175%. The Privilege tax has a minimum tax of $100, and maximum tax of $15,000 per year.
For example, if the net worth of your business was $600,000, your Privilege Tax would be $1,050 ($600,000 x 0.175%).
Payroll taxes in Alabama
Unemployment taxes usually consist of three factors. They are the wage base, range of rates, number of schedules. Below is an outline of the three:
- Wage Base – Alabama has a low wage base of $8,000
- UI Rates – range from 1.15% to 7.30% depending on the rate schedule
- Schedules – Alabama has four rate schedules regarding Unemployment taxes.
Alabama DMV Registration Fees
Alabama DMV fees are based on the value of your vehicle (Ad Valorem Taxes). They multiple the fair market value of your vehicle times 15%-20% and your mileage. Unfortunately, the State of Alabama does not provide an online vehicle registration calculator for you, however they do provide this page of information.
Most states have the 183-day rule to be presumed a resident for tax purposes. But not Alabama. You are presumed to be a resident of Alabama if spend more that 7 months in aggregate in the State.
State Tax on Social Security Benefits
Even though Alabama has an income tax, social security benefits are not subject to state tax in “Heart of Dixie.”
Alabama Business Entities – LLCs
Alabama refers to its yearly LLC fee as a Privilege Tax. Here are some important facts:
- Alabama annual LLC fee (a.k.a. Privilege Tax) is $100
- The year you register with the State, you pay a one-time fee of $150.00
- Secretary of State of Alabama website – click here