Taxes can be simplified if you don’t have any assets, deductions, or dependents but that doesn’t mean they’re easy, especially when you consider the nuances of Alabama tax laws.

Mistakes made during filing could mean that you end up paying more than should’ve had to or that you now owe money to the government. Depending on your income, these errors can be increasingly costly.

Community Tax is the tax firm trusted by Alabamans to make filing taxes a smooth process instead of a huge hindrance every April.

Take advantage of our easy-to-use Alabama tax calculator when filing your income taxes this year or have one of our tax experts do it for you. Either way, Community Tax is your resource for reliable and timely tax services.

Living in The Heart of Dixie has its fair share of charm from the statewide southern hospitality to beautiful landscapes. You’ll also benefit from the considerably low housing costs, especially if you plan on renovating a house that has maintained its charismatic 1800’s exterior.

Whatever reason brought you to call Alabama home, you’ll also be happy to find out that Alabama taxes are notably lower than many other states. Paying state taxes in Alabama doesn’t necessarily have to be seen as a negative either.

The revenue created with taxes enables the government to provide the necessary programs and services to maintain quality of life in the Yellowhammer State like preserving state parks and improving the education system.

How Much Is Alabama State Tax?

The Alabama tax rates you should be familiar with are:

While paying all these taxes may seem like a significant burden, Alabamans typically enjoy a lower cost of living.

Alabama tax brackets are based on two general categories:

Note: If you’re claiming Head of Family, you must be unmarried. You should also be aware that a foster child does not count toward qualification for this filing status in the state of Alabama.

Alabama taxpayers who freelance or work as independent contractors pay 15.3% self-employment tax. That probably sounds really high but you can deduct half of what you pay in self-employment taxes and you’re only taxed on about 92% of your income, if not less.

Self-employed taxpayers typically qualify for at least a few deductions to account for the cost of running your own business which can significantly reduce your tax bill.

Whether you live in Alabama full time or not, you’ll be expected to pay income taxes in Alabama if:

Note: If you’re retired, you should know that Social Security and qualified private pensions are not taxed in Alabama.

What’s Included in My Gross Income?

You’re required to report all taxable income on your Alabama state taxes. Your gross income is all the income you’ve received in the last year before any deductions and taxes are applied. This typically includes your wages, bonuses, and dividends.

In addition to these more obvious income sources, there is a detailed list you should review when trying to figure out what qualifies as income. Under-reporting your income could lead to costly penalties.

What If I Was Laid Off This Past Year?

It’s undeniable that getting laid off is rough, but at least Alabama provides a tax break.

The first $25,000 of your severance pay is exempt from Alabama state taxes. For your tax purposes, severance pay includes compensation for unemployment, termination pay, or any income from a supplemental income plan.

Note: To qualify for this exemption, you’ll need to send in a written request for exemption which includes the company’s downsizing plan and any termination information provided by your employer.

You’ll probably need to reach out to your former employer for assistance. The review and approval process can take up to a month so it’s beneficial to put your request in well before your taxes are due.

Capital gains are the profits you make off selling assets such as real estate. In the state of Alabama, capital gains are taxed at the same rate as income. So, if you fall in the 5% income tax bracket, you’ll pay 5% in capital gains tax on any assets you’ve sold.

It might sound unnecessarily confusing but understanding the difference is simple: if you’ve owned an asset for more than one year, it’s considered a long-term capital gain; assets that are held for under a year are.

In Wisconsin, you can deduct 30% of your net capital gains from your taxable income. If you work in farming or a related industry, you can deduct 60% of capital gains made from the sale of farming assets. The limit for capital gains deductions in Wisconsin is $500.

Calculating capital gains can be difficult because there are many nuances that affect how they are applied to your taxable income. If you’ve sold a large number of assets this year, you can benefit from the assistance of one of our experienced team members who can find you the best tax solution possible.

Note: Reporting your capital gains on your federal and Wisconsin taxes may differ.

The state sales tax in Alabama is 4% on all tangible personal property such as clothing and household goods. Each city and county can also impose additional sales taxes which can make fees significantly higher depending on where you live.

Local sales tax is calculated by adding the state sales tax, the county sales tax, and the city sales tax, as well as any additional taxes that may apply. For example, Birmingham’s sales tax is currently 9% if you combine the Alabama state tax rate at 4%, 4% city sales tax, and the 1% county sales tax.

With hundreds of cities and counties in the state, it can be difficult to figure out how much sales tax you’re individually responsible for. You can use the Alabama Department of Revenue’s lookup tool to find out the local sales tax rates where you live.

Sales Tax Holidays

Alabamans can take advantage of two sales tax holidays: Back-to-School and Severe Weather Preparedness. On these days, you can purchase certain items at a tax-free or reduced tax rate.

The Back-to-School Sales Tax Holiday is the weekend of July 19th-21st in 2019 and includes general use clothing items under $100, computers and related supplies under $750, school supply items under $50, and books that cost $30 or less.

The Severe Weather Preparedness Sales Tax Holiday will be February 21st-23rd, 2020. Items you can purchase tax-free include batteries, plywood, smoke and carbon monoxide detectors, as well as other emergency products under $60. You could also purchase a portable generator priced $1,000 or less which could come in handy during tornado season.

Excise tax is an additional tax that’s applied to certain items that can sometimes have costly consequences on the environment or your health. The revenue from these taxes is usually allocated to different parts of the state’s overall budget. Common items subjected to the excise tax in Alabama include:

Tobacco Products

An excise tax of about $0.68 is charged for every 20-pack of cigarettes. A pack of cigarettes in Alabama costs about $5.50 on average, with the excise tax you’re paying upwards of $6 but it’s still a lot cheaper than smoking in states like California and New York.

Chewing tobacco and the typical can of snuff have an excise tax of about $0.02 per ounce.

Liquor

Liquor can become much more pricey than expected with the markups imposed by the Alabama Alcohol Control Board which can be as high as 35% with additional excise taxes charged at about 56% of the markup price. Regular sales taxes also apply.

Fuel

The Gasoline tax is $0.24 per gallon which means that you’re paying $2.16 in excise taxes when you fill up a 12-gallon tank.

Diesel fuel is taxed slightly higher at $0.25 per gallon. Alabama’s gas tax is low in comparison to other states like Illinois or even Michigan which charge excise taxes of $0.38 and $0.26 per gallon respectively. Funds from fuel excise taxes are often used to improve roadways.

If you don’t have health insurance, you’ll no longer be subject to a tax penalty for your state or federal taxes.

Alabama’s health insurance premiums and relevant taxes are expected to decrease in 2019. Additionally, Alabama offers a tax credit on premiums if you’re enrolled in a qualified plan. Medicare and Medicaid supplement policies and employer-sponsored plans for government employees are exempt.

State property taxes are meant to fund public services like transportation and sanitation. In fact, according to recent research by ATTOM™ Data Solutions, the effective property tax rate in Alabama is about 0.48%, making it the state with the second-lowest property tax rate.

Homeowners in the Heart of Dixie benefit from fairly low property taxes with an average of $776. If that still sounds like a lot of money, compare that number to the average $2,000 property tax bill in Colorado or the nearly $3,000 many Californians pay.

Remember, property taxes are due October 1st, not April 15th like your income taxes. If you don’t make the payment deadline, you could be considered delinquent as of January 1st.

How Do I Know How Much I Owe?

If you look up how to determine your property tax bill online, it can seem very overwhelming because there are several factors to consider. But it’s actually fairly simple once you break it down. There are two main steps to calculating your property taxes:

• Determine the assessed value which is the appraised value multiplied by the property classification.
  • For residential property in Alabama, the property classification rate is 10%.
• You’ll then multiply the assessed value by the millage rate (1 mill = $0.0 1) for the county you live in.
  • a. Each year, millage rate documentation is updated and made available for all counties.

Your unadjusted tax bill is the amount you owe before any deductions or exemptions are applied so don’t worry just yet if it seems higher than you expected.

Property Taxes on Vehicles

Alabama also charges property taxes on automobiles and pickup trucks. Calculating the property taxes you owe on your car isn’t as difficult as it sounds if you follow the same steps as you would for your home’s property taxes. Except, instead of a 10% property classification rate, it’s 15%.

If that’s too much math for your liking, one of our tax agents is more than happy to help you out.

Deductions Property Owners Should Know About

Worried about your property tax bill? Alabama provides a variety of tax incentives for homeowners, including some pretty accessible exemptions and deductions that can reduce how much you owe, such as:

Homestead Exemption

You may qualify for the homestead exemption if: deductions allowed for the taxable year.

Even better, it doesn’t matter what your income is. These property tax initiatives are also another reason why Alabama is considered to be retiree-friendly.

Catastrophe Savings Account Deduction

One way to potentially reduce your tax bill is to establish a catastrophe savings account because you can count it towards your deductions.

Since it’s not uncommon for Alabama to experience serious storms like tornadoes which can severely damage your property, it makes sense to start one of these accounts if you’re a homeowner.

A catastrophe savings account is meant to cover the expenses needed to pay for repairs and damages not covered by our insurance after a catastrophic storm or flood.

Note: When you set up your catastrophe savings account, just make sure that it’s specifically designated for this purpose with your bank.

Upgrades or Retrofitting Deduction

If you’ve made some upgrades or retrofitted your house this year, you might qualify for a deduction. These upgrades must contribute to reducing the damage that could be caused by a tornado, hurricane, other catastrophic windstorm events, or rising floodwaters.

Note: The upgrades or retrofitting need to meet the FORTIFIED Home™ requirements and must undergo an inspection by a qualified evaluator.

Not sure what renovations would qualify under Alabama’s retrofitting deduction? Think in terms of improvements that would make your home more structurally resilient—such as replacing your roof to resist wind and rain damage. The process is actually less complicated than it sounds.

You’ll work with the evaluator to determine which upgrades or retrofitting projects are recommended for your area.

Throughout the process, they’ll ensure that the improvements are implemented in accordance with the best standards and meet the necessary requirements so you’ll be able to enjoy peace of mind and protect your investment.

For this deduction, you can claim whichever amount is less, either $3,000 or 50% of the actual retrofitting cost you incurred. Unfortunately, rentals and newly constructed homes don’t qualify for the deduction.

Alabama taxpayers no longer have to worry about an inheritance tax. Many states do but Alabama decided to eliminate estate taxes as of 2009. You should be aware that if your loved one was a resident of another state, you might be responsible for paying an inheritance tax based on that state’s laws.

As an Alabaman, you don’t need to worry about gift taxes either when filing your state return. But when it comes to filing your federal taxes, you might.

If you’ve received any fees as an executor or administrator of an estate, there’s also a chance you’ll have to report it as part of your taxable income.

At Community Tax, we understand that losing a loved one is difficult enough without trying to navigate the complexities of federal and state tax laws. One of our team members can provide guidance to eliminate any confusion and help you complete your taxes correctly.

You might not be excited about having to pay your taxes but at least Alabama provides some relief with tax credits. Tax credits are initiatives that can subtract money from your tax bill, dollar for dollar. Since this means that you’ll end up owing the state less money, you should take advantage of as many credits as possible, such as:

• Alabama Accountability Credit (contributions to educational scholarships)
• Growing Alabama Credit (contributions made to local economic development organizations)
• Rehabilitation, Preservation, and Development of Historic Structures Credit

While Alabama offers several income tax incentives, the state doesn’t provide a credit for childcare expenses. Don’t miss out on claiming your savings, work with a tax professional at Community Tax to make the most of Alabama’s generous tax credits.

Deductions are another tax incentive provided by the state of Alabama. Unlike credits, deductions are subtracted from your taxable income, decreasing your overall tax liability. The standard deduction for Alabama state taxes depends on your filing status and income.

Alabama also allows for several exemptions if you’d rather do itemized deductions. Alabama exemptions include:

• Tuition benefits received from the Alabama Prepaid Affordable College Tuition (PACT) program
• Child support
• Homestead exemption
• Welfare benefits
• Retirement pay for eligible firefighters, peace officers, or designated beneficiaries
• Military retirement pay
• Self-employment tax deduction (should be itemized on a cash basis)
• Life insurance proceeds you’ve received
• Workers’ compensation benefits
• Unemployment compensation
• Job-related expenses (travel, transportation, meals, etc.)

Special Considerations

You might be surprised to find that Alabama doesn’t allow deductions for childcare expenses either. If you’re an active-duty military member, you might be able to exclude combat pay and some other allowances, but you’re not exempt from Alabama income tax.

Personal Exemptions

For your state taxes in Alabama, you can claim personal exemptions up to $1,500 if you are filing as single or married filing separately, or up to $3,000 if you’re filing as married filing jointly or head of family.

Should I List My Standard or Itemized Deductions?

After you’ve calculated the amount of itemized deductions you qualify for, compare that the standard deduction table to see which one is greater. You’ll want to use whichever ends up being greater.

Still not sure how to go about listing your deductions on your return? Maximizing your deductions is as simple as speaking with one of our team members who can evaluate your circumstances and provide the best recommendation based on years of knowledge and experience.

Feeling stressed about trying to figure out how much you owe in taxes? Here are a few tips to help you tackle the filing process:

• Gather and review all the necessary forms you’ll need to complete your taxes
• Find out whether you’re being claimed as a dependent by your parents
• Make sure you understand basic tax jargon
• Use our Alabama tax calculator to easily figure out how much you owe
• Double-check everything you fill out
• Make sure you file by the April 15th deadline

Both full-time and part-time residents should complete Form 40 or a 40EZ Form. If you’re planning to file a 40EZ, you should review the qualifications before filing your Alabama state income taxes.

For instance, you must be filing as either single or married filed separately, have no other reportable income other than your wages, and do not plan to claim any itemized deductions. Non-residents should complete Form 40NR.

Enlisting the help of an agent at Community Tax can alleviate the pressure of tax season. Not only can we file your taxes on your behalf but we can also avoid penalties, help you with delinquent taxes, or apply for debt forgiveness.

If you expect to owe $500 or more, you’ll need to make estimated tax payments. You can either pay in one lump sum on or before April 15th or make four equal payments. If you choose to make the four payments, they are due April 15th, June 15, September 15th, and January 15th.

Note: The only exception is if two-thirds or more of your income is generated from farming, in which case you can make your tax payment any time before January 15th.

If you underpay by $500 or more, you may be charged a penalty.

There are three easy ways to pay your state taxes in Alabama:

• 1. E-pay through MAT
• 2. Make a credit card payment
• 3. Mail your payment

If you’re not going to be able to file your taxes by the April 15th due date, Alabama allows for an automatic six-month extension, meaning you’ll have until October 15th to file.

But if you think you’ll owe more than $500 and plan to pay by mail, you’ll need to submit Form 40V and make sure to check the box for “Automatic Extension Payment”.

What If I’m Expecting a Refund?

If you’re expecting to receive a refund instead of owing anything, it’s highly recommended that you file your tax return online and make sure to get it in as early as possible. This way you’ll receive your refund faster.

Do you still have questions about Alabama state taxes? Schedule a free consultation with one of our team members to get clarity.

• Alabama has two sales tax holidays, Back-to-School (July 19th-21st) and Severe Weather Preparedness (February 21st-23rd)
• All Alabamans are still required to pay a Confederate veterans tax. This tax generates about $400,000 in annual revenue to support the Confederate Memorial Park.
• Alabama requires tax stamps to be used on any illegal drugs being sold. Not using a stamp can result in jail time for distribution as well as tax evasion. Unsurprisingly, many dealers do not comply with this law.
• If you’ve been laid off this year due to administrative downsizing, the first $25,000 of your severance pay is exempt from Alabama state taxes.

Federal taxes are paid to the Internal Revenue Service (IRS), a bureau of the United States Department of Treasury. The money collected from your federal income taxes is used to pay the government’s bills and fund important programs that benefit U.S. citizens.

A portion of federal taxes is also delegated to each state. State taxes are also collected by each state to meet the needs of their local government. Alabama taxes are collected by the Alabama Department of Revenue.

This information is accurate as of 2019. Special circumstances which can affect your tax return may apply.

Sources: Alabama Department of Insurance, Alabama Department of Revenue, Alabama Retail Association, Healthinsurance.org, Tuscaloosanews.com, Yahoo! Finance