There is no estate tax in Alabama. However, residents may still be subject to the federal estate tax if their estate is worth enough. If you live in the Cotton State and are starting to think about estate planning, this guide will explain what you need to know so that you can make sure all of your loose ends are tied up. If you want help with estate planning or with financial planning more generally, think about finding a financial advisor to help. SmartAsset’s free financial advisor matching service can help you find an advisor in your area.
Alabama Estate Tax
Alabama is one of the 38 states in the union that does not levy an estate tax at the state level.
What Is the Estate Tax?
The estate tax is often called the “death tax.” It is a tax levied on the estate of a recently deceased person and is applied before the money is passed on to heirs. Only estates that reach a certain threshold are subject to the estate tax.
The estate tax is not the same as the inheritance tax, which is applied after the money or other assets have already been passed on to a deceased person’s heirs.
Alabama Inheritance and Gift Tax
There is also no inheritance tax in Alabama. The inheritance laws of other states might apply to you, though, if your loved one lived in a state that has an inheritance tax and left you something from their estate. In Pennsylvania, for instance, the inheritance tax applies to out-of-state inheritors. Make sure to look at the laws of the state your grantor lived in once you receive your inheritance.
There is also no gift tax in Alabama. The federal gift tax has a $16,000 annual exemption per gift receiver in 2022, going up to $17,000 in 2023. You can give up to $17,000 to any number of people without having to declare the gifts in your tax return. There is also a lifetime gift tax exemption of $12.92 million. Exceeding $17,000 in gifts to any one person in a given year counts against that and lowers your federal estate tax exemption.
Federal Estate Tax
No matter how big your estate, you won’t owe any estate tax in Alabama. The federal estate tax still applies, though. The exemption for the federal estate tax is $12.92 million for deaths in 2022, going up to $12.92 million in 2023. For married couples, the tax is portable. This means that with the right legal steps up to $25.84 million is protected when both spouses die.
If the estate exceeds that amount, the federal estate tax tops out at 40%. A full federal estate tax rate chart is below.
Here’s how it works. Let’s say you have a $18.74 million estate and you are not married. Subtract the $12.92 million exemption, leaving a taxable estate of $5.82 million. Looking at the chart, you are in the highest bracket. The base payment on the first $1 million is $345,800. Then you pay 40% on the remaining $4.82 million, which is $1.928 million. That amount plus the base of $345,800 comes out to a total estate tax payment of $2,273,800.
FEDERAL ESTATE TAX RATES
| Taxable Estate* | Base Taxes Paid | Marginal Rate | Rate Threshold** |
| $1 – $10,000 | $0 | 18% | $1 |
| $10,000 – $20,000 | $1,800 | 20% | $10,000 |
| $20,000 – $40,000 | $3,800 | 22% | $20,000 |
| $40,000 – $60,000 | $8,200 | 24% | $40,000 |
| $60,000 – $80,000 | $13,000 | 26% | $60,000 |
| $80,000 – $100,000 | $18,200 | 28% | $80,000 |
| $100,000 – $150,000 | $23,800 | 30% | $100,000 |
| $150,000 – $250,000 | $38,800 | 32% | $150,000 |
| $250,000 – $500,000 | $70,800 | 34% | $250,000 |
| $500,000 – $750,000 | $155,800 | 37% | $500,000 |
| $750,000 – $1 million | $248,300 | 39% | $750,000 |
| Over $1 million | $345,800 | 40% | $1 million |
*The taxable estate is the total above the federal exemption of $12.92 million.
**The rate threshold is the point at which the marginal estate tax rate kicks in.
Overall Alabama Tax Picture
Alabama is tax-friendly for retirees. The state does not tax Social Security or private or public pensions. Withdrawals from retirement accounts like 401(k) plans are fully taxed, though the top tax rate for income is a relatively low 5%. The sales tax, though, is among the highest in the country. The base rate for the state is 4%, and with local taxes it can reach as high as 11.50%. Unlike in some states, food is subject to sales tax in Alabama.
Property taxes, though, are low in the state. The average effective property tax rate is just 0.39%, and the homestead exemption may make it even lower for seniors.
Estate Planning Tips
- If you’re thinking about your estate, it might make sense to find a financial advisor to help you with planning. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- One common estate planning mistake is not naming a guardian for any minor children you have. It isn’t fun to think about, but you’ll sleep better knowing a plan is in place if the worst were to happen.
- Another key part of estate planning is knowing how much money you’ll have saved in your retirement accounts. SmartAsset’s retirement calculator shows how much money you can expect to have by the time you reach your golden years.
Photo Credit: © iStock/GCShutter, © iStock/Allard1