Alabama Tax Rates

This post provides an overview of the primary taxes levied at the state level in Alabama. The information contained here is intended for general reference. For individuals or businesses seeking comprehensive support with tax filings, compliance, or strategic planning, indinero offers expert services. We encourage all who utilize this summary to explore the tailored tax support available through indinero.

Individual Income Tax

Alabama levies a graduated individual income tax with a relatively low ceiling. The tax structure is progressive, with rates ranging from 2% to 5%.

  • Tax Brackets: The top rate of 5% applies to taxable income over $3,000 for single filers and over $6,000 for married couples filing jointly. Due to these low thresholds, most taxpayers quickly reach the maximum rate.
  • Deduction: Alabama is one of the few states that allows taxpayers to deduct their federal income taxes paid from their state taxable income, which can reduce the effective state tax burden, particularly for higher earners.

Sales and Use Tax

Sales tax is a significant component of Alabama’s revenue, although the state rate is modest compared to the national average.

  • State Rate: The state sales tax rate is 4.0% on the sale of tangible personal property.
  • Local Taxes: Counties and municipalities impose their own separate sales taxes, which can be quite high. As a result, the combined state and local sales tax rates often average over 9% statewide, placing Alabama among the states with the highest combined sales tax burdens.
  • Use Tax: A corresponding use tax of 4.0% is imposed on items purchased outside of Alabama but brought into the state for storage, use, or consumption, provided state sales tax was not paid.

Property Tax

Alabama is notable for having some of the lowest property tax rates in the nation. Property taxes are primarily levied at the local level (county and city) to fund local services and schools.

  • Effective Rate: The average effective property tax rate on owner-occupied homes is approximately 0.36% of the home’s fair market value.
  • Assessment Ratios: Property is classified for tax purposes. Class I (utility property) is assessed at 30% of its appraised value, Class II (commercial and industrial property) is assessed at 20%, and Class III (residential and agricultural property) is assessed at 10% of its appraised value. Tax is paid on this assessed value, not the full market value.

Corporate Income Tax

Corporations operating or deriving income from sources within Alabama are subject to the corporate income tax.

  • Tax Rate: The rate is 6.5% of the corporation’s net income.
  • Deduction: Similar to the individual income tax, Alabama allows corporations to deduct their federal income taxes paid, which reduces the amount of income subject to the state tax.
  • Apportionment: For companies doing business in multiple states, Alabama uses the single sales factor apportionment method to determine the portion of income taxable by the state.

Business Privilege Tax

In addition to the Corporate Income Tax, Alabama imposes a Business Privilege Tax on corporations, limited liability companies (LLCs), limited partnerships, and other entities with limited liability.

  • Nature of the Tax: This tax is an annual fee based on the business entity’s net worth in Alabama.
  • Rate Structure: The rates range from $0.25 to $1.75 per $1,000 of net worth, with the applicable rate depending on the entity’s federal taxable income.
  • Minimum/Maximum: A maximum tax liability is set at $15,000 for most business types. Effective for tax years beginning in 2024, businesses that owe $100 or less are exempt from the tax.

Key Excise Taxes

Alabama collects several excise taxes on specific goods and services.

  • Motor Fuel Tax: A tax is levied on motor fuels, including gasoline and diesel, with the rate currently set at approximately 30.2 cents per gallon. This revenue is primarily dedicated to funding transportation and road maintenance projects.
  • Cigarette Tax: The state imposes an excise tax on cigarettes, which is currently $0.675 per pack of 20 cigarettes.

R&D Offer Quiz

Step 1 of 3

Answer to find out if you're eligible for R&D tax credits.

Do the activities performed relate to a new or improved business component’s function, performance, reliability, quality, or composition?(Required)
For Example: A mid-sized packaging company develops a slightly modified cardboard box design to improve its stacking strength (reliability) for warehouse storage, involving minor adjustments to the corrugation pattern to reduce collapse under standard weight loads.
Is your company trying to discover information to eliminate uncertainty concerning the capability or method for developing or improving a business component?(Required)
For Example: A furniture manufacturer investigates whether a cheaper wood adhesive can hold joints as effectively as the current one during assembly, testing bond strength to resolve doubts about its capability in standard production lines.
Do the activities performed constitute a process of experimentation?(Required)
For Example: An auto parts supplier runs a series of bench tests on different lubricant formulations to find one that reduces friction in engine bearings more effectively, systematically comparing wear rates over simulated operating cycles.