Alabama residents may receive pensions, annuities, and retirement distributions that are partially taxable for Alabama income tax purposes. Alabama conforms to federal adjusted gross income (AGI), and retirement distributions are included in federal AGI to the extent taxable at the federal level. Alabama provides a retirement income exclusion for qualifying taxpayers, and partially taxable amounts are determined using worksheets and reported on Schedule RS when applicable.
Reporting Requirements
- Partially Taxable Distributions: Taxpayers determine the taxable portion of pension, annuity, or eligible IRA distributions using the worksheet provided in the Form 40 instructions. The worksheet generally calculates the taxable amount based on total distributions and the taxpayer’s cost basis (previously taxed contributions), as applicable under federal and Alabama conformity rules.
- Schedule RS: Alabama residents report qualifying retirement income and exclusions on Schedule RS. The taxable portion of retirement income is reflected on the appropriate sections of Schedule RS for the primary taxpayer or spouse, as applicable.
- IRA and Retirement Plan Distributions: Distributions from traditional IRAs, SEP plans, Keogh plans, 401(k), and 403(b) plans are generally included in federal AGI and are taxable for Alabama purposes to the extent they are taxable federally, subject to any allowable cost basis recovery. Roth IRA distributions are generally not taxable if they meet federal qualification requirements and are excluded from federal AGI.
Nonresident Considerations
- Nonresidents filing Form 40NR are taxed only on Alabama-source income. Pension and annuity income is generally not Alabama-source income and is not included in Alabama taxable income for nonresidents, even though it remains part of federal AGI.
- Nonresident returns use allocation rules to determine Alabama taxable income, and retirement income is generally excluded unless it is specifically connected to Alabama-source activity under applicable law.
Source:
Form 40.pdf
Form 40NR.pdf
Disclaimer: Always verify details with the official Alabama Department of Revenue forms and instructions. For complex situations, consult a CPA or tax attorney.