Updated October 5, 2026. Quick answer: Yes. Alabama taxes trust income at graduated rates of 2%, 4% and 5%, and the Form 41 instructions require a return from “All resident trusts with net income over $1,500 for the year” and from nonresident trusts with Alabama derived income.
How Alabama treats trust income
| Item | What the documents say |
|---|---|
| Treatment | Alabama taxes the income of resident and nonresident trusts and estates through Form 41, the Fiduciary Income Tax Return. The source says: “All resident trusts with net income over $1,500 for the year” and nonresident trusts must file on Alabama derived net income. |
| Who counts as a resident trust | The instructions separate resident from nonresident trusts, and the Form 41 asks the filer to check one box, but the documents read do not set out a settlor, trustee, beneficiary or situs test. |
| Rate on trust income | Tax is figured on a worksheet with three bands, 2% on the first $500, 4% on the next $2500 and 5% on all over $3000 of Alabama taxable income. The source says: “The tax rates are established by Section 40-18-5.” The instructions give no flat rate for ordinary trust income. |
| Distribution deduction | An Alabama income distribution deduction is allowed on Schedule A for income distributed or distributable to beneficiaries. The source says: “The Alabama income distribution deduction is generally computed in accordance” with the federal rules for trusts, using Alabama amounts. |
| Exemption and electing small business trusts | A trust receives an exemption of $1,500 in computing Alabama taxable income, and nonresident trusts apportion it when they have income in Alabama and another state. An electing small business trust computes tax on its S corporation portion at a flat 5% on a separate schedule. |
| Nonresident trusts | A nonresident trust reports only Alabama source income and files if it has any Alabama derived net income after deductions. The source says: “income earned from property owned or business transacted in Alabama” is the Alabama source income the instructions describe. |
| Return to file | Resident and nonresident trusts file Alabama Form 41 with a complete federal Form 1041 attached, and calendar year returns are due April 15. The source says: “All non-residents trusts with any Alabama derived net income after” deductions must file Form 41. |
A $10,000 example
The tax on $10,000 of taxable income a trust keeps depends on the bracket it lands in. Taxed wholly at the lowest printed rate, 2%, the tax is computed as $10,000 x 2% = $200; taxed wholly at the highest, 5%, it is computed as $10,000 x 5% = $500. The state’s own schedule decides which applies. Federal tax on the trust’s income still applies.
Income the trust passes out to a beneficiary is handled as the distribution deduction row above describes.
What changes in 2026
The latest documents read print no 2026 change to how trust income is taxed.
Federal rules
The state’s treatment sits on top of the federal one. The federal brackets a trust faces are laid out in trust tax brackets versus individual brackets, and capital gains that a trust keeps are covered in capital gains stay in the trust. The IRS explains the federal return in the About Form 1041 page.
Related: how Alabama taxes retirement income, whether Alabama taxes pensions, what a living trust costs in Alabama, and federal trust tax brackets.
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Answer againSources
- Alabama Form 41 General Instructions, 2025 (Alabama Department of Revenue): https://www.revenue.alabama.gov/wp-content/uploads/2025/12/25f41instr.pdf
- Alabama Form 41 Fiduciary Income Tax Return, 2025 (Alabama Department of Revenue): https://www.revenue.alabama.gov/wp-content/uploads/2025/12/25f41.pdf
Sources: the primary documents linked above, read on October 5, 2026. General information, not tax advice. Your own facts decide the outcome, and a preparer, the plan administrator or the agency itself is the right place to confirm anything consequential.