A person has to pay income tax in Alabama if they are a resident of the state. How much they'll pay will depend on how long they live in the state during the year. Residents can have only one domicile, or place they live permanently, at a time for tax purposes.
Who Is a Resident of Alabama?
Someone who domiciles in Alabama full time is a resident of that state. An individual's domicile is the place where they live permanently – by birth, choice or law – and intend to return to if they leave for a while. According to state residency requirements, a person can have only one domicile at a time, which they establish until they find a new one and abandon their old one.
Alabama taxpayers carry the burden of proof regarding a change of residence, even if they don't own property, don't have income or a place to live. A person who maintains a permanent home in the state or spends more than seven months of the tax year in the state is considered a resident.
Filing Tax Returns for the Time Resident in Alabama
Residents of Alabama must file a tax return reporting their state income for the time they reside there. They do not have to report income earned before they lived in the state. When an Alabama resident changes domicile to another state, they must inform the state or it will continue to consider them a resident, and they will have to pay state income tax.
A person who just moved into the state is a part-year resident, while someone who does not own property but works in Alabama is a nonresident. Their income may be taxable, and they may need to claim a credit for the taxes that go to another state if both states tax the same income.
How Residents File Taxes in Alabama State
A person living in Alabama that earns at least $5,250 a year has to file a state income tax return. Married couples earning a combined income of at least $10,500 can file a joint return. To file, they use a Form 40A (short) or Form 40 (long).
Residents can use the short form if they've lived in the state for the entire year and do not have itemized deductions, do not file Schedules C, D, E, or F, or ask for deductions after paying taxes in a different state. If they don't meet these conditions, they must file using the long form.
Alabama Residents Working in a Different State
Alabama residents who work in a different state may face dual taxation. But they can avoid it by filling out a Schedule CR form and attaching it with their W-2, Form 40 and their tax return from the other state.
If they worked in one or more states, they must determine how much they'll pay to each and what they'll claim from Alabama as a refund. They must file a Schedule CR for additional states to claim the credit.
Nonresident Tax Returns in Alabama
The state considers a person who worked or sold property in Alabama but does not live there to be a nonresident. Regardless, they must pay taxes if they earned more than $1,500 as an individual or $3,000 while married.
Nonresidents pay taxes on different types of income, such as sales (including property sales), commissions, wages or salaries. To file a nonresident tax return, they must use Form 40NR.
Spouses and Alabama Residency Status
If one spouse is a resident of Alabama and the other is not, each must file their tax returns using married filing separately status. Both parties file their taxes separately on their state return, but they can file jointly on the federal return.
Couples can file separate returns if both spouses had income or only one had income. A spouse that files an individual return is responsible for reporting their own credits, deductions, exemptions, income and the taxes due on that return.
Active Duty Military Personnel and Their Spouses
Military personnel domiciled in Alabama when they enter the service remain residents of the state for income tax purposes until they prove a change of residence has occurred. Service members who are nonresidents, but stationed in the state do not have to file a tax return in Alabama unless they earned money through Alabama sources other than military pay.
The Military Spouses Residency Relief Act (MSRRA) states that a military spouse can declare the same legal residence as the spouse stationed in that state. The Veterans Benefits and Transition Act allows spouses to choose a domicile regardless of when their marriage took place, but they must meet certain conditions:
- The service member lives on military orders in a state that is not their resident state.
- Their spouse is in that state only to live with the service member.
- Both spouses have the same resident state.
The spouse pays only income taxes in their resident state when they meet these conditions.
Foreign Residents of Alabama
The state of Alabama considers a foreign citizen who comes to Alabama for work, buys a home there and secures an Alabama driver's license, but doesn't apply for citizenship because they intend to return to their home county, as a person who establishes domicile. This means they are liable for tax on income earned while working in the state.
Conversely, if an Alabama resident accepts foreign employment for a fixed or indefinite period with the intent of returning, they are still an Alabama resident. They must pay state tax on that income no matter where they earn it, even if they have no property in the state.
Retiring as a Resident of Alabama
Retirees from the private sector who live in the state won't see their pension taxed if it came from a defined benefit retirement plan. Alabama law also exempts military retirement income and earnings from government pensions. However, the state does not exempt all retirement income; it taxes certain IRA distributions and 401(k) plans as ordinary income.
The state tax rate is from 2 percent up to $1,000 for joint filers and $500 for others to 5 percent on more than $6,000 for joint filers and $3,000 for others on 401(k) funds, IRA distributions or other income. The state does not tax Social Security benefits.
Benefits of Living in Alabama
Alabama is one of the cheapest states in the U.S. to call home. Residents pay approximately 12 percent less for goods and services than they do in other states. A person moving to Alabama will notice this right away if they're coming from a more expensive state.
However, salaries in Alabama are also relatively low. For example, restaurant workers receive only $2.13 an hour plus tips. For this reason, Alabama may be better for retirees than someone still in their prime money-making years.
- Income Tax Pro: Alabama Tax Forms 2020
- TaxSlayer: What is my residency status for Alabama?
- TaxHow: Alabama Tax Filing
- Military On Source: Military Spouses Residency Relief Act:
- eFile: Married Filing Separately Tax Filing Status
- Alabama Department of Revenue: Form 40 NR
- Kiplinger: 14 States That Won't Tax Your Pension
- Retirepedia: 25 Pros And Cons Of Living In Alabama
Michelle Nati is an associate editor and writer who has reported on legal, criminal and government news for PasadenaNow.com and Complex Media. She holds a B.A. in Communications and English from Niagara University.