Moving to Alabama

You are an Alabama resident if Alabama is your domicile: the one place you live, keep your permanent home and intend to return to when you are away. A domiciled resident owes Alabama tax on all income, wherever earned, and gets a credit for income tax another state charges on the same income. Someone domiciled elsewhere is still presumed to be an Alabama resident if he or she maintains a permanent place of abode in Alabama or spends more than seven months of the year here, and the burden of proving a change of domicile is on the taxpayer, not the Department. In the year of a move, you file Form 40 as a part-year resident for the Alabama months, with the full personal and dependent exemptions but only a prorated share of the federal income tax deduction. Alabama has no reciprocal agreement with any state, so a resident who works across the line pays both states and takes the credit, and a nonresident who works in Alabama files Form 40NR on wages for work physically performed here.

The rest of the return, the standard deduction that shrinks with income, the federal tax deduction, the 2%, 4% and 5% brackets, is in How Alabama income tax works. What follows is the part that changes when a state line is involved.

Resident, nonresident, part-year

The Department’s rule distinguishes domicile from residence. Residence is “a transient place of dwelling”; domicile is “the place where one lives and has his permanent home and principal establishment.” A person has one domicile at a time, and it continues until a new one is established and the old one abandoned. Intent is judged by actions: where you vote, where your driver’s license and car registration are, where your spouse and children live, where you claim a homestead exemption, where your doctors and church and bank are. An Alabama domiciliary who spends a year working out of state remains an Alabama resident and reports the out-of-state wages here, with a Schedule CR credit for the tax the other state charges. A servicemember who entered the service as an Alabama resident keeps that status wherever stationed until a change of home of record is proved.

The presumption runs the other way too. Someone domiciled elsewhere who keeps a dwelling permanently maintained in Alabama, whether or not he owns it or lives in it himself, or who spends more than seven months of the year in Alabama, is presumed a resident and must rebut the presumption. A retiree with a winter home on the Gulf who stays past seven months has an Alabama residency problem as well as a former-state one.

A part-year resident is someone whose domicile changed during the year. For the months of Alabama residence, you file Form 40 reporting the income received in that period, from any source. If you also had Alabama-source income while a nonresident, say you moved away in June but kept an Alabama rental, you file Form 40NR for the rest of the year as well, and the exemptions all go on the Form 40. Each return carries only the income and deductions for its own period; itemized deductions are limited to what was paid while in that status.

The part-year Form 40

Three things are different about a part-year Form 40. The income is only what you received while an Alabama resident, allocated by the date of each paycheck, distribution or sale, not by where it was earned. The personal exemption and the dependent exemptions are allowed in full; Alabama does not prorate them for part-year residents. And the federal income tax deduction on line 12 is prorated by the ratio of Alabama adjusted gross income to federal adjusted gross income: someone who earned half the year’s income in Alabama deducts half the year’s federal tax. The standard deduction comes from the chart using the Alabama AGI on the part-year return, which for a six-month resident is often low enough to earn the full $8,500 joint or $3,000 single rather than the floor.

Retirement income follows the same date rule. A pension or IRA payment received while an Alabama resident is Alabama income, and is then exempt or taxable by Alabama’s plan-type rules: a defined benefit pension comes off, an IRA distribution stays in, less the $6,000 exclusion at 65. Payments received before the move belong to the former state, and federal law stops either state from taxing the other’s period. Capital gains are allocated by the date of sale, so the gain on selling the old house before moving is not Alabama income, and gain on a principal residence is excluded on the federal pattern anyway.

Nonresidents: Form 40NR

A nonresident owes Alabama tax on Alabama-source income: wages for services performed in Alabama, income from a business or rental property here, gain on Alabama real estate, and a partner’s or shareholder’s share of an Alabama business’s income. Interest, dividends and retirement income of a nonresident are not Alabama income. The return is Form 40NR, and it must be filed when Alabama-source income exceeds the prorated personal exemption, which for most people means almost any Alabama wages at all.

Form 40NR works by percentage. Line 10 is Alabama AGI divided by total AGI from all sources, capped at 100%. The personal exemption, the standard deduction and the federal income tax deduction are each multiplied by that percentage; itemized deductions are prorated the same way. The dependent exemption is also prorated (verify). A nonresident who earns $20,000 of a $100,000 income in Alabama deducts 20% of his federal tax and 20% of his exemptions, and pays Alabama at the regular rates on what is left. Schedule CR is not available on Form 40NR; the credit for double-taxed income is taken on the home state’s return.

Working across the line

Alabama has no reciprocal agreement with any neighboring state. Wages are taxed by the state where the work is physically performed and by the state of residence, and the resident state gives the credit. Three cases cover nearly everyone.

You live in Alabama and work in another state. The other state taxes the wages as nonresident income if it has an income tax. Alabama taxes them too, as a resident, and you take a credit on Schedule CR for the other state’s tax, limited to the Alabama tax on the same income, which at 5% is often the smaller number. If the other state has no income tax, there is nothing to credit and Alabama’s 5% is the whole bill. Attach the other state’s return. Schedule CR is for Form 40 only, so anyone with the credit cannot use the short Form 40A.

You live in another state and work in Alabama. You file Form 40NR on the Alabama wages and claim the credit, if any, on your home state’s return. Your Alabama employer withholds Alabama tax from the first day; there is no exemption certificate for out-of-state commuters because there is no reciprocity to invoke. If the job is inside Birmingham, Bessemer, Auburn, Opelika, Gadsden or another city with an occupational license tax (verify current list), that 1% to 2% is withheld too, and it is final: no return, no refund, no credit against anyone’s income tax.

You live in Alabama and work remotely for an employer elsewhere. The wages are Alabama income because the work is performed in Alabama; the employer’s state has no claim on them under Alabama’s view, and Alabama applies no “convenience of the employer” rule of its own. If the employer’s state nonetheless taxes the wages under a rule of its own, the Schedule CR credit applies only to income Alabama also taxes, and the Department may question a credit for tax on work done in Alabama (verify). Ask the employer to withhold Alabama tax on Form A-4 and stop withholding for the other state; if it will not, make estimated payments.

Military

Active-duty pay of a servicemember domiciled in Alabama is taxable by Alabama wherever he or she is stationed, except combat zone pay, the quarters, subsistence, uniform and travel allowances, and qualifying National Guard and Reserve deployment pay, which Act 2024-170 expanded. A servicemember domiciled elsewhere and stationed in Alabama owes nothing on military pay and need not file unless there is other Alabama-source income, such as a civilian second job here. Under the Military Spouses Residency Relief Act, a nonresident spouse who is in Alabama only to be with the servicemember does not have Alabama-source wages either, and should give the Alabama employer the paperwork to stop withholding. Military retirement pay is exempt for everyone.

The year you move: a checklist

• Fix the date. The day your domicile changed decides which paychecks, distributions and sales belong to which state. Keep the lease, closing statement or moving receipts that prove it.
• Tell the employer. File Form A-4 with the Alabama employer, or ask an out-of-state employer to start Alabama withholding and stop the old state’s. Alabama’s withholding uses its own form, not the federal W-4.
• Change the paperwork that proves domicile: driver’s license, car registration, voter registration, the address on your federal return, bank and brokerage accounts.
• Claim the homestead exemption. Apply once at the county revenue commissioner or tax assessor; you must own and occupy the home on the first day of the property tax year, October 1. At 65 the state share of the tax disappears and the county share may too; see Alabama for retirees.
• Watch estimated payments. Alabama requires them once you expect to owe $500 after withholding. In a move year the former state’s withholding does Alabama no good.
• Review retirement distributions. Pension payers can stop state withholding, since Alabama exempts pensions; IRA custodians should start it, at 5%.
• Keep the former state’s return. Alabama wants it attached to Schedule CR if any income is taxed by both.
• If you are leaving Alabama, do the same in reverse, and expect the former state’s presumption to apply if you keep an Alabama house or spend more than seven months here.