Alabama taxable income generally follows federal adjusted gross income with specific Alabama modifications. Income is taxable unless specifically excluded or exempted under Alabama law. For residents filing Form 40 and nonresidents filing Form 40NR, the following categories represent common examples of income that are generally included in Alabama taxable income.
Types of Taxable Income in Alabama
- Wages and Salaries: Includes compensation for services such as wages, salaries, bonuses, commissions, fees, tips, and taxable fringe benefits.
- Interest and Dividends: Interest income from bank accounts, certificates of deposit, bonds, notes, mortgages, and taxable dividend income from investments.
- Business and Professional Income: Net income from self-employment, sole proprietorships, partnerships, trades, or professional activities.
- Rents and Royalties: Income received from leasing real property or from intellectual property such as patents, copyrights, and mineral rights.
- Capital Gains: Taxable gains from the sale or exchange of capital assets such as stocks, bonds, and real estate, subject to Alabama conformity with federal rules.
- Alabama Taxable Pension and Retirement Distributions (when applicable): Certain retirement income may be taxable depending on age and source, subject to Alabama’s statutory exclusions and limitations.
- Gambling and Lottery Winnings: Income from casinos, lotteries, raffles, and other gambling activities is generally taxable.
- Other Taxable Income Items: Includes miscellaneous income such as taxable prizes, awards, and other income items included in federal adjusted gross income unless specifically excluded by Alabama law.
Income Not Included in Alabama Taxable Income
- Social Security Benefits: Generally not subject to Alabama income tax.
- Certain Retirement Income Exclusions: Qualified retirement income may be partially or fully excluded depending on age, income thresholds, and plan type under Alabama law.
- Out-of-State Income for Nonresidents (Not Alabama-Source): Nonresidents are taxed only on income derived from Alabama sources. Income earned outside Alabama is not included in Alabama taxable income for Form 40NR purposes.
- Military Pay (Sourcing Rule): Military compensation is generally taxed based on residency status. For nonresidents, military pay is not Alabama-source income. For residents, it is generally included in taxable income unless excluded under applicable federal provisions such as combat zone exclusions.
- Other Statutorily Exempt Income: Includes income items specifically exempt under Alabama law or excluded through conformity adjustments.
Nonresident Taxation Rule
- Nonresidents filing Form 40NR are taxed only on Alabama-source income. Alabama taxable income is determined by allocating federal adjusted gross income to Alabama sources using the Alabama income ratio method, typically based on:
- Alabama-source income ÷ Total income
- Only income connected to Alabama employment, business activity, property, or other Alabama sources is included.
Source:
Form 40 (Alabama Resident Return)
Form 40NR (Alabama Nonresident Return)
Disclaimer: Always verify with the most current Federal or State Department of Revenue Forms and Instructions. Tax rules may vary based on individual circumstances. For complex situations, consult a CPA or tax attorney.