In 2022, a new law was passed in Alabama that could have a positive impact on your state tax returns. If you are at or nearing retirement, pay close attention to the details of this new law and adjust your retirement plan accordingly.
About the Alabama Income Tax Code
Alabama state income taxes are assessed on a graduated scale from 2.00% to 5.00%, depending on your income and filing status. Compared to the rest of the U.S., Alabama state taxes are moderate. While Alabama’s overall cost of living is considered low, you won’t find them in our 10 Worst States for Taxes or our 10 Best States for Taxes.
One positive portion of the tax code in Alabama is the provision exempting many forms of retirement income, like Social Security and pension income, from taxation. Still, other sources of retirement income remain taxable. Beginning in 2023, retirees who draw income from taxable sources could enjoy some of the same tax benefits as those who receive pension and Social Security income.
The Lynn Greer Retirement Income Tax Cut Act of 2022 Could Reduce State Tax for Alabama Retirees
The Lynn Greer Retirement Income Tax Cut Act of 2022 was passed in April. The bill will add a provision to the tax code that exempts the first $6,000 in taxable retirement income for certain retirees. The bill was named after Representative Lynn Greer who has worked for more than a decade to bring tax relief to Alabama retirees. Representative Greer said that he originally proposed a more substantial exemption, up to $30,000, but this bill is a step in the right direction. He said “This is a start. This is something. It just makes us more fair.”
Who does this new tax law benefit?
Under the new law, resident taxpayers over age 65 who receive qualified retirement income will be eligible to claim the exemption. This income could include Required Minimum Distributions [RMDs] from IRAs, voluntary withdrawals from IRAs, and taxable distributions from employer sponsored plans like 401(k)s.
This new addition to the Alabama state tax law could provide some mild relief for retirees. While this change was lauded as a big step in the right direction, Representative Greer estimates that those who claim the full exemption will save only $240 each year on their state income taxes.
How to Take Advantage of the Exemption
The Lynn Greer Retirement Income Tax Cut Act will take effect January 1, 2023. Those who file their own taxes will find instructions for claiming the exemption on their 2023 state tax forms. Those who rely on a professional to file their taxes shouldn’t need to take any additional action to claim the exemption.
For more information about the new exemption and how it could impact your tax liability, contact an experienced financial advisor. In addition, retirees and those preparing for retirement should ensure that their financial plan accurately reflects the latest developments in tax law, like the Lynn Greer Retirement Income Tax Cut.
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Your retirement plan should be comprehensive – including strategies to minimize taxes, maximize investment income, reduce risk, and prepare your estate according to your wishes. That’s why you need a team of professionals on your side.
At Meld Financial, our team of tax, legal, and investment specialists has spent nearly 40 years helping our clients achieve their retirement dreams. During that time, we developed Financial Fingerprint® – a comprehensive wealth management plan that is quick to assemble, easy to understand, and simple to modify as your circumstances change. With Financial Fingerprint®, and the support of our experienced team, you can plan for all aspects of your financial future, including projecting your tax liability and working to minimize it.
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