Updated October 5, 2026. Quick answer: Yes. Alabama taxes interest and dividends as ordinary income on rates of 2%, 4% and 5%, and its booklet says dividends received “in 2025 are fully taxable”. Interest on U.S. obligations and on Alabama’s own bonds is exempt; other states’ bonds are not.
How Alabama treats dividends and interest
| Item | What the documents say |
|---|---|
| Treatment | Taxed on the graduated schedule |
| Rates (single) | “2% First $500 of taxable income”; “4% Next $2,500 of taxable income”; “5% All taxable income over $3,000” |
| U.S. obligations | Exempt: “interest on obligations of the United States or its possessions” |
| Alabama bonds | Exempt: “Interest on obligations of the State of Alabama or any county”, municipality or other political subdivision of Alabama |
| Other states’ bonds | Taxable, because the booklet prints the exemption only for Alabama and U.S. obligations |
| Treasury securities | The booklet lists U.S. Treasury Bills, U.S. Treasury Notes and Series E and H bonds as exempt; Fannie Mae, Ginnie Mae and Freddie Mac interest is listed as taxable |
| Schedule B | Required when total taxable and nontaxable income from interest and dividends is $1,500 or more |
A $20,000 example
Taxable dividends and interest of $20,000 for a single filer whose income is already above $3,000 add $20,000 x 5% = $1,000 of Alabama tax.
What changes in 2026
The latest documents read print no 2026 change to the way dividends and interest are taxed.
Federal rules
The state’s treatment sits on top of the federal one. Qualified dividends and ordinary dividends are sorted out on the Form 1099-DIV, as the site explains in Box 1a and 1b: ordinary versus qualified dividends, and interest is reported as covered in 1099-INT Box 1. The IRS explains the federal side in Topic no. 403, Interest Received and Topic no. 404, Dividends.
Related: whether Alabama taxes capital gains, whether Alabama taxes pensions, how Alabama taxes retirement income, dividends and interest tax by state, and how tax-exempt interest is reported.
Find the right next step for your situation
About how much do you have invested? Pick the range that fits; your next step appears immediately below.
Compare vetted advisors for your investments
If your portfolio is $250,000 or more, this connects you (free, with no obligation to hire anyone) with 2 to 3 vetted advisors.
Before you start, what actually happens. The matching service is run by WiserAdvisor, an independent advisor-matching company. It opens on their site, asks for your ZIP code and a few questions, and matches you with 2 to 3 vetted advisors. It is free to you.
WiserAdvisor states the service is built for portfolios of $250,000 and above. By submitting, you consent to emails, phone calls and text messages from WiserAdvisor and up to three advisors, so expect to be contacted. Clear Money Guide may earn a referral payment for a qualifying completed form, whether or not you ever hire anyone.
Opens on WiserAdvisor’s site in a new tab.
See how an advisor weighs your portfolio
Price the destination before you decide. The matching service below introduces you to advisers who pay to meet you.
Before you start, what actually happens. The form is run by Kapitalwise, our advisor-matching partner. Kapitalwise sends your details to advisers who pay for the introduction, so expect calls and texts. Clear Money Guide may earn a referral payment through this service, whether or not you ever hire anyone. This is free to you and there is no obligation to hire anyone.
The Kapitalwise form opens here; you stay on this page.
What happens when you press the button
It asks about nine questions: age, investable assets, location; then your name, email and phone number, and verifies the phone by text. Nothing loads and nothing reaches Kapitalwise until you press the button.
Prefer flat-fee or hourly pricing instead? Compare ranges here.
Answer againSources
- 2025 Form 40 Booklet, Schedule B instructions (Alabama Department of Revenue): https://www.revenue.alabama.gov/wp-content/uploads/2026/01/25f40bk.pdf
- What is Alabama’s Individual Income Tax Rate? (Alabama Department of Revenue): https://www.revenue.alabama.gov/faqs/what-is-alabamas-individual-income-tax-rate/
- What interest income is exempt from Alabama taxation? (Alabama Department of Revenue): https://www.revenue.alabama.gov/faqs/what-interest-income-is-exempt-from-alabama-taxation/
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.