Alabama income tax for 2026: rates, deductions and retirement income

Alabama has three income tax rates: 2%, 4% and 5%. For single filers, heads of family and married people filing separately, 2% applies to the first $500 of taxable income, 4% to the next $2,500 and 5% to everything over $3,000. On a joint return each bracket is twice as wide, so 5% starts above $6,000. The rates are the same as in 2025; no 2026 law changed them.

Because the 5% rate starts so low, the lower rates make little difference. Once taxable income passes $3,000, the tax equals 5% of taxable income minus $40; on a joint return over $6,000, it is 5% minus $80. A single filer with $40,000 of taxable income owes $1,960 before credits, about 4.9%.

The 5% rate is also a ceiling: the Constitution of Alabama says the income tax rate “shall not exceed 5 percent.” Capital gains are part of taxable income and are taxed at the same three rates, though since 2025 a net gain from exchanging precious metal bullion is exempt.

Alabama sets its own standard deduction, and it shrinks as income rises. The full amount applies while Alabama adjusted gross income (AGI) is under $26,000, or under $13,000 if married filing separately. Above that it falls in steps, as the table shows, until it reaches a floor at $35,500 of AGI, or $17,750 filing separately. You can itemize on Alabama’s Schedule A instead if that gives you a larger deduction.

Everyone also gets a personal exemption: $1,500 if single or married filing separately, and $3,000 if married filing jointly or filing as head of family, Alabama’s version of head of household. Each dependent adds $1,000 if your AGI is $50,000 or less, $500 if it is over $50,000 up to $100,000, and $300 above $100,000.

Alabama’s dependent test is stricter than the federal one. You must have paid more than half of the person’s support, and the person must be a relative, such as a child, stepchild, parent, grandparent, brother, sister or in-law; a foster child, cousin or friend does not qualify. All of these are fixed dollar amounts in the Code of Alabama, with no inflation adjustment, and the two 2026 laws that rewrote these sections, Acts 2026-603 and 2026-604, left them unchanged.

Alabama lets you deduct the federal income tax you owe for the year, on top of the standard deduction or itemized deductions. The right is in the state constitution, which since 1965 has allowed residents to deduct “the amount of federal income tax paid or accrued within the taxable year.” Nonresidents deduct only the share that goes with their Alabama income.

It is not the federal tax withheld from your pay, and Form 40 warns against entering that. You work it out on a worksheet in the Form 40 instructions: take the tax on line 22 of your federal Form 1040, add any net investment income tax, and subtract refundable credits, including the earned income credit, the additional child tax credit and the refundable part of the American opportunity credit. Enter the result on Form 40, line 12, and attach pages 1 and 2 and Schedule 1 of your federal return.

The deduction moves with your federal tax. At the 5% rate, $4,000 of federal tax deducted saves up to $200 of Alabama tax, and anything that cuts your federal tax, including the new federal deductions for tips, overtime and seniors, also shrinks this deduction. Part-year residents prorate it by the share of their federal AGI that is Alabama AGI, and a married couple filing a joint federal return but separate Alabama returns splits it by each spouse’s share of federal AGI.

Some of it. Alabama does not tax Social Security benefits, and it exempts many pensions: military retirement pay, federal civil service and railroad retirement, Alabama’s teachers’, state employees’ and judicial retirement systems, and payments from any defined-benefit plan, a pension that pays a benefit set by the plan rather than from an account in your name. The defined-benefit exemption dates from 1991, and the Department of Revenue suggests asking your plan administrator whether your plan qualifies.

Withdrawals from IRAs, 401(k) and 403(b) plans and similar accounts are taxable, apart from contributions that were already taxed, and so are pensions and annuities that are not on the exempt list. Since 2023, a taxpayer who is 65 or older can exclude the first $6,000 of that taxable retirement income each year. On a joint return each spouse who is 65 or older gets a separate exclusion, up to $6,000 of his or her own taxable retirement income. You claim it on Schedule RS.

Move away and Alabama generally stops taxing your pension: the Form 40NR instructions say pension and annuity payments received by a nonresident are not subject to Alabama tax. A nonresident still counts them when working out what share of total income came from Alabama.

Alabama exempted overtime pay in full from January 1, 2024 through June 30, 2025. At first the exemption covered what full-time hourly employees were paid for hours over 40 in a week; from October 1, 2024 it covered overtime figured under the federal Fair Labor Standards Act. It ended June 30, 2025. Overtime earned after that date is taxed like other wages on 2025 returns, and Alabama did not adopt the federal overtime deduction for 2025.

For 2026 through 2028, Act 2026-604 gives a deduction instead. You can deduct your qualified overtime compensation, which is only the premium part of overtime pay, up to $1,000 per taxpayer, whether or not you itemize. If your base pay is $10 an hour and overtime pays $15, only the extra $5 an hour counts. Employers still report all overtime as Alabama wages, so tax is withheld on it during the year, and they show the premium in box 12 of Form W-2 with code TT; you claim the deduction on your 2026 return in 2027.

Other parts of the July 2025 tax law (Public Law 119-21) reach the Alabama return only where Alabama law ties to them. Based on the Department of Revenue’s analysis and the laws Alabama passed in 2026:

A full-year resident must file if gross income reaches the threshold for their filing status in the table above, which is the full standard deduction plus the personal exemption. Part-year residents use the same figures for income received while living in Alabama, and nonresidents file if their Alabama gross income is more than their prorated personal exemption. Even below the thresholds, you need a return to get back Alabama tax withheld from your pay.

Alabama returns are due on the same date as the federal return: April 15, 2027 for 2026 returns, as April 15, 2026 was for 2025 returns. The six-month extension to file, to October 15, 2027, is automatic and needs no form, but it is not an extension to pay. Pay what you expect to owe by April 15 with Form 40V or online through My Alabama Taxes; otherwise interest runs and a late-payment penalty of 1% a month, up to 25%, applies. A late return with tax due adds 10% of the tax or $50, whichever is more.

In most cases you must pay estimated tax for 2026 if you expect to owe at least $500 after withholding and credits, and your withholding and credits will be less than the smaller of 90% of your 2026 tax or 100% of your 2025 tax. Use 110% instead of 100% if your 2025 Alabama AGI was over $150,000, or $75,000 if married filing separately. Payments are due April 15, June 15 and September 15, 2026, and January 15, 2027; a farmer with at least two-thirds of gross income from farming can skip them by filing and paying by March 1, 2027.

Alabama’s income tax is the same across the state, but some cities and counties also tax the wages earned inside their limits through an occupational tax. These are local taxes: the Department of Revenue says the state does not administer them, and employers generally withhold them from pay and send them to the city or county.

Birmingham’s is 1% of wages earned in the city: its own example takes 1% of $7,500 of monthly wages, $75, due by the 20th of the next month. Bessemer, Gadsden and Opelika publish occupational tax forms for employers on their city websites, and a local law in the Code of Alabama sets a 1% occupational tax on earnings in parts of Macon County. Under a 2020 state law, a city or town cannot start a new occupational tax on individuals unless the legislature authorizes it by local law; taxes in effect before February 1, 2020 continue.

On your Alabama return, an occupational tax does not count as Alabama income tax withheld, so leave it out of the withholding you claim. If you itemize, you can deduct the city, county and occupational tax shown on your W-2 on Schedule A.

Alabama taxes residents on all their income, wherever it is earned, and nonresidents only on Alabama income, such as pay for work done in the state or a gain on Alabama property. Residence turns on domicile, the place you live, have a permanent home and intend to return to. You keep an Alabama domicile until you set up a new one and abandon the old, and the burden of proving a move is on you. The law also presumes you are a resident if you keep a permanent place of abode in Alabama or spend more than seven months of the year there.

In the year you move, file Form 40 as a part-year resident and report only the income you received while living in Alabama. You keep the full standard deduction and exemptions, but itemized deductions count only if paid while a resident, and the federal tax deduction is prorated. Alabama income from your months as a nonresident goes on Form 40NR. If you are an Alabama resident and your spouse is a resident of another state, you cannot file a joint Alabama return; you file as married filing separately.

An Alabama resident taxed by another state on the same income claims a credit on Schedule CR and attaches a copy of the other state’s return. The credit is the lower of the other state’s tax or the Alabama tax on that income; part-year residents can claim it only if both returns cover the same period, and there is none for wages from a state without an income tax. From 2026, a nonresident who works in Alabama on 30 or fewer days in a year, and in more than one state, owes no Alabama tax on that pay if the home state has no income tax or offers a similar exclusion; professional athletes, entertainers and public figures are left out.