Alabama — Personal Income Tax

Individuals domiciled in Alabama are subject to Alabama personal income tax on their entire income, whether earned within or outside Alabama, regardless of their physical presence in the state during the taxable year. Domicile is defined as the place where one lives, has a permanent home, and has the intention of returning when absent. Each person has one and only one domicile, which continues until a new one is established coupled with abandonment of the old. A temporary absence from Alabama does not automatically change domicile for income tax purposes, and the burden of proving a change of domicile rests on the taxpayer.

Full-year Alabama residents must file a return if their gross income exceeds threshold amounts based on filing status: single filers must file if gross income is at least $4,000; married filing separately at $5,250; head of family at $7,700; and married filing jointly at $10,500.

Source: Alabama Department of Revenue — Who must file an Alabama Individual Income Tax Return?

Alabama imposes a graduated personal income tax on taxable income at three rates: 2%, 4%, and 5%. For single persons, heads of family, and married persons filing separately, the rates are 2% on the first $500 of taxable income, 4% on taxable income over $500 up to $3,000, and 5% on all taxable income over $3,000. For married persons filing jointly, the brackets are doubled: 2% on the first $1,000 of taxable income, 4% on taxable income over $1,000 up to $6,000, and 5% on all taxable income over $6,000. These rates apply to taxable income, which is Alabama adjusted gross income minus deductions and exemptions. The maximum rate of 5% is constitutionally capped by Amendment No. 25 to the Alabama Constitution of 1901.

Source: Ala. Code § 40-18-5 | Alabama Department of Revenue — Individual Income Tax Rate FAQ

Nonresident individuals who receive taxable income from property owned or business transacted within Alabama—including wages for personal services performed in the state—are subject to Alabama personal income tax on that Alabama-source income only. Nonresidents must file Form 40NR if their Alabama gross income exceeds the prorated personal exemption. The personal exemption is prorated by multiplying the standard personal exemption by the ratio of Alabama adjusted total income to adjusted total income from all sources. Part-year residents who have both resident and nonresident periods during the tax year must file two returns: Form 40 for income earned during the resident period and Form 40NR for Alabama-source income during the nonresident period.

Source: Ala. Admin. Code r. 810-3-15-.21 | Alabama Department of Revenue — Nonresident Filing FAQ

Alabama allows personal exemptions that reduce taxable income. Single filers and married taxpayers filing separately may claim a $1,500 personal exemption. Married couples filing jointly and head-of-family filers may claim a $3,000 personal exemption. When married taxpayers file separately, each spouse must claim a $1,500 personal exemption.

Dependent exemptions — tiered by adjusted gross income

Taxpayers may claim an exemption for each qualifying dependent who receives over half of their support from the taxpayer. The exemption amount is tiered by adjusted gross income under Ala. Code § 40-18-19(a)(9)(b), effective for tax years beginning after December 31, 2006:

• $1,000 per dependent for taxpayers with AGI equal to or less than $20,000
• $500 per dependent for taxpayers with AGI greater than $20,000 and equal to or less than $100,000
• $300 per dependent for taxpayers with AGI greater than $100,000

The base $300 dependent exemption established by subdivision (9)(a) continues to apply to taxpayers with AGI above $100,000. The statute defines a dependent as any person other than a spouse who is dependent upon the taxpayer and over half of whose support, for the calendar year in which the taxable year for the taxpayer begins, was received from the taxpayer.

Proration for nonresidents

Nonresident individual taxpayers are allowed only a prorated share of the personal exemption and dependent exemptions. The proration is calculated by multiplying the exemption amounts by the ratio of the nonresident's adjusted gross income received from Alabama sources to total adjusted gross income from all sources. This proration rule is set forth in Ala. Code § 40-18-19(b).

Source: Ala. Code § 40-18-19

Alabama allows taxpayers to claim an optional standard deduction in lieu of itemizing certain expenses. The deduction amount is income-based and varies by filing status. For single filers with adjusted gross income below $25,500, the standard deduction is $3,000; it phases down by $25 for each $500 of AGI exceeding that threshold, with a floor of $2,500. For married taxpayers filing jointly with AGI of $20,000 or less, the deduction is $7,500. The statute establishes phase-out schedules and minimum deduction floors for other filing statuses and income levels. Taxpayers may alternatively claim itemized deductions specified in the statute.

Source: Ala. Code § 40-18-15(b)

Alabama individual income tax returns are due on the same date as the corresponding federal income tax return, which is April 15 for most calendar-year individual taxpayers. When April 15 falls on a weekend or holiday, the return is due the next business day.

Automatic six-month extension

Alabama grants an automatic six-month extension of time to file, extending the deadline to October 15 for calendar-year filers. No extension form—paper or electronic—is required to be filed to obtain this automatic extension. The extension is granted automatically without any action by the taxpayer.

Extension of time to file is not an extension of time to pay

The automatic extension applies only to the filing deadline, not to the payment deadline. Taxpayers who anticipate owing additional tax must submit payment by the original April 15 due date using payment voucher Form 40V. Interest accrues on any unpaid tax from the original due date of the return (April 15 for calendar-year filers) until the date of payment, regardless of whether the taxpayer has an extension to file. Late payment penalties also apply if tax is not paid by the original due date.

Special rule for taxpayers abroad

Except in cases where taxpayers are abroad, no extension will be granted for more than six months. The Alabama Department of Revenue does not publish specific authority for longer extensions for taxpayers abroad comparable to the federal rule, but the general extension statute allows for this exception.

An extension means only that the taxpayer will not be assessed a penalty for filing the return after the original due date. It does not eliminate interest on unpaid tax or penalties for late payment of tax.

Source: Alabama Department of Revenue — Individual Income Tax Filing Information | Alabama Department of Revenue — When should I file my Alabama Individual Income Tax Return? | Alabama Department of Revenue — Due Dates

Alabama allows individual income taxpayers to deduct the amount of federal income tax paid or accrued within the taxable year when calculating Alabama taxable income. This deduction is authorized by Ala. Code § 40-18-15(c), which states: "A deduction is allowable for the amount of federal income tax paid or accrued within the taxable year." The deduction is constitutionally protected by Amendment 225 to the Alabama Constitution of 1901, which provides that "the individual taxpayer is allowed to deduct federal income tax paid from their individual gross income."

Full deduction for residents

Alabama resident taxpayers may deduct the full amount of federal income tax paid or accrued during the taxable year. The statute does not limit the deduction amount or impose a cap. The deduction is based on the taxpayer's method of accounting—federal income tax paid for cash-basis taxpayers, or federal income tax accrued for accrual-basis taxpayers.

Trade-off with optional increased standard deduction

Taxpayers who elect the optional increased standard deduction available to certain qualified persons under Ala. Code § 40-18-15.7 must forego the federal income tax deduction. Section 40-18-15.7(d) states: "Persons qualifying for the optional increased standard deduction must voluntarily forego their right to claim the federal income tax deduction as allowed by Section 40-18-15." This is an either-or election; taxpayers must choose between the two benefits.

Proration for nonresidents

Nonresident taxpayers may deduct only a prorated share of their federal income tax. Section 40-18-15(c) specifies the calculation: "In the case of a nonresident taxpayer, the amount of federal income tax deductible to Alabama shall be determined by the ratio that the amount of adjusted gross income received from sources within the State of Alabama bears to the amount of adjusted gross income received from sources within and outside the State of Alabama." This fraction—Alabama AGI divided by total AGI—is multiplied by the total federal income tax paid or accrued to determine the deductible amount for Alabama purposes.

Recognition in withholding

The federal income tax deduction is recognized for Alabama withholding purposes. Ala. Code § 40-18-71(a) provides that employers shall withhold Alabama income tax on wages "reduced by the optional standard deduction provided in subsection (b) of Section 40-18-15 and the federal income tax withheld." This allows employees to benefit from reduced Alabama withholding on a current basis, rather than waiting to claim the deduction on their annual return.

Practical significance

The federal income tax deduction substantially reduces Alabama taxable income. For a taxpayer with significant federal income tax liability, the Alabama tax savings equals 5% (Alabama's top marginal rate under Ala. Code § 40-18-5) of the federal tax deducted—a notable reduction in effective state tax liability. Alabama is one of a small number of states that permit taxpayers to deduct federal income tax when computing state taxable income.

Source: Ala. Code § 40-18-15 | Ala. Code § 40-18-15.7 | Ala. Code § 40-18-71 | Alabama Department of Revenue — Income Tax Incentives

Alabama allows resident individuals a credit against Alabama income tax for income taxes paid to other states or territories on income that is also subject to Alabama tax. This credit prevents double taxation of the same income by multiple jurisdictions. The credit is available only to Alabama residents; nonresidents are not eligible because their Alabama tax applies only to Alabama-source income.

Statutory authority and availability

Ala. Code § 40-18-21(a)(1) provides that Alabama residents whose gross income is derived from sources both within and outside Alabama "shall be allowed a credit against the amount of tax found to be due by such resident, on account of income derived from outside the State of Alabama, the amount of income tax actually paid by such resident to any state or territory on account of business transacted or property held, directly or indirectly, outside the State of Alabama."

The credit became available to all resident individuals for tax years beginning after December 31, 1996. Prior to 1997, resident taxpayers subject to the Multistate Tax Compact's allocation and apportionment provisions were not allowed this credit, but that restriction was eliminated by Acts 1997, No. 97-625.

Credit calculation — lesser-of rule

The credit amount is the lesser of (1) the income tax actually paid to the other state or territory, or (2) the amount of Alabama tax that would be due on the same income computed at Alabama tax rates.

Under Ala. Code § 40-18-21(a)(2), "In case the amount of tax actually paid by an individual resident of Alabama to another state or territory is in excess of the amount that would be due on the same income computed on the income tax rate in Alabama, then only such amount as would be due in this state on such taxable income shall be allowed as a credit." This limitation ensures that the credit does not reduce Alabama tax below what would have been owed if the income had been earned in Alabama.

When a taxpayer pays income tax to more than one other state, Ala. Admin. Code r. 810-3-21-.01(3)(a)(1)(i) requires that "the tax credit must be computed separately for each state." The credit for each state is computed under the lesser-of formula, and the credits are then summed.

Maximum credit and apportionment

The credit may not be used to offset Alabama tax attributable to Alabama-source income. Ala. Admin. Code r. 810-3-21-.03(1) states: "The credit for tax paid or incurred to other jurisdictions shall not be used to offset that portion of a taxpayer's income tax liability which is attributable to Alabama sources. The credit for tax paid or incurred to other jurisdictions shall only be utilized against that portion of the taxpayer's income tax liability which is attributable to income from other jurisdictions."

To determine the maximum creditable amount, the taxpayer calculates the portion of Alabama tax liability attributable to non-Alabama sources by multiplying total Alabama tax liability (before credits under § 40-18-21) by a fraction: the numerator is total non-Alabama source adjusted gross income, and the denominator is total Alabama adjusted gross income. This apportionment calculation is set forth in Ala. Admin. Code r. 810-3-21-.03(2). The credit cannot reduce Alabama tax below the amount attributable to Alabama-source income.

Nonresidents ineligible

Ala. Admin. Code r. 810-3-21-.01(1)(e) expressly provides: "Taxable income of a nonresident includes only income derived from sources within the state, and therefore, no credit is allowable for taxes paid to other states." Because nonresidents owe Alabama tax only on Alabama-source income, there is no double taxation to relieve.

Documentation requirements

Before claiming the credit, Ala. Code § 40-18-21(a)(4) requires the resident to "file with his or her Alabama income tax return a certificate showing the amount of gross and net income derived, directly or indirectly, from sources outside this state, together with the amount of tax paid or to be paid on such income." The Alabama Department of Revenue instructs taxpayers to claim the credit on Form 40, Schedule CR, and to attach a copy of each other state's nonresident return showing the tax payment claimed as credit.

Pass-through entity owners

Resident individual owners of pass-through entities (partnerships, LLCs taxed as partnerships, S corporations, estates, or trusts) may claim a credit for their proportionate share of income taxes the entity paid to other states on the owner's behalf.

Ala. Code § 40-18-21(c)(1) allows resident individuals who include their proportionate share of pass-through entity income in Alabama gross income to claim "a credit for their proportionate share of the income tax actually paid by the entity to any state or territory on account of business transacted or property held outside the State of Alabama, whether the payment was made on behalf of the resident individual owner or because the entity was not recognized by such state or territory as a non-taxable pass-through entity." This credit is also claimed on Schedule CR.

Source: Ala. Code § 40-18-21 | Ala. Admin. Code r. 810-3-21-.01 | Ala. Admin. Code r. 810-3-21-.03 | Alabama Department of Revenue — Credit for Pass-Through Entity Taxes Paid to Other States FAQ

Alabama exempts several categories of retirement income from personal income tax, with varying dollar limitations and eligibility conditions depending on the source and type of retirement payment.

Alabama state retirement system benefits — full exemption

Retirement allowances, pensions, annuities, and optional allowances approved by the Teachers' Retirement System of Alabama and the Employees' Retirement System of Alabama are fully exempt from Alabama income tax. These exemptions apply to benefits paid to retirees and their designated beneficiaries under the respective state retirement systems. The exemptions are authorized by Ala. Code § 40-18-19(a)(1) and (2), which incorporate by reference the tax-exempt status provided in the underlying statutes establishing those retirement systems (Ala. Code §§ 16-25-23 and 36-27-28).

Police and firefighter retirement — full exemption

All retirement compensation, allowances, pensions, and annuities received by eligible peace officers or firefighters (or their designated beneficiaries) from any Alabama police or firefighting retirement system are fully exempt from Alabama income tax, provided the payments result from police services or fire protection services rendered. Originally established in 1984 and 1987 with an $8,000 cap, the exemption was expanded to a full exemption for tax years beginning on or after January 1, 1991. The current full exemption is codified at Ala. Code § 40-18-19(a)(3), (4), and (5).

Military retirement — full exemption

All retirement payments or compensation received as retirement benefits from the military services of the United States and survivor benefits derived therefrom are fully exempt from Alabama income tax for tax years beginning on or after January 1, 1989. The exemption originally began in 1975 at $4,750, increased to $8,000 in 1983, to $10,000 in 1985, and became unlimited in 1989 under Ala. Code § 40-18-20(d).

Federal civil service retirement — full exemption

Income received as annuities under the United States Retirement System from the United States Government Civil Service Retirement and Disability Fund is fully exempt from Alabama income tax. This exemption, authorized by Ala. Code § 40-18-19(a)(5), includes income received from the Tennessee Valley Authority's pension system.

Defined benefit plans — full exemption

Payments from defined benefit plans, as defined by Internal Revenue Code § 414(j), are exempt from Alabama income tax to the extent the benefits are taxable for federal income tax purposes. This exemption applies to both qualified and nonqualified defined benefit plans, including excess benefit plans and supplemental executive retirement income plans (SERPs). The exemption does not apply to defined contribution plans such as 401(k) plans or IRA distributions. The regulation clarifies that where a combination of plans exists and the defined benefit plan distribution is reduced as a result, only the amount actually distributed from the defined benefit plan is exempt. This exemption is established by Ala. Admin. Code r. 810-3-19-.04.

General retirement income exemption for taxpayers 65 and older — partial exemption

Individual taxpayers age 65 or older may exclude a limited amount of taxable retirement income that does not otherwise qualify for a specific exemption listed above. For tax years 2023 through 2025, the exemption is $6,000 of taxable retirement income. Beginning January 1, 2026, the exemption increases to $12,000. This age-based exemption is available only to individuals who are 65 years of age or older and may only be claimed once per taxpayer. The exemption is codified at Ala. Code § 40-18-19(a)(13).

Interaction of exemptions

The exemptions for Alabama state retirement systems, police, firefighters, military, federal civil service, and defined benefit plans are categorical exemptions that apply without dollar limitation. Retirement income that qualifies for one of those exemptions is fully excluded from Alabama gross income. The $6,000/$12,000 exemption for taxpayers 65 and older is a residual exemption that applies only to taxable retirement income not already exempt under one of the specific categorical exemptions. For example, a 67-year-old retiree receiving a $30,000 pension from a private-sector defined benefit plan would exclude the entire $30,000 under the defined benefit exemption; the same retiree receiving $30,000 from IRA distributions would exclude $6,000 (or $12,000 for 2026 and later) under the age-65-and-older rule and owe Alabama tax on the balance.

Source: Ala. Code § 40-18-19 | Ala. Code § 40-18-20 | Ala. Admin. Code r. 810-3-19-.04