Updated October 7, 2026. Quick answer: Only if you live there. Alabama’s nonresident instructions say pension and annuity payments “received by a nonresident are not subject to Alabama tax” while Alabama residents are taxed on their entire income, with several public and defined benefit retirement systems left out of income and up to $6,000 of other taxable retirement income excluded for each taxpayer 65 or older.
How Alabama treats a pension earned elsewhere
| Item | What the state documents say |
|---|---|
| Nonresidents | The Form 40NR booklet says pension and annuity payments received by a nonresident are not subject to Alabama tax, although pension payments that would be taxable to a resident must be counted in total adjusted gross income to compute the Alabama income ratio. A nonresident is taxed on income received within or for services performed in Alabama. This rests on the nonresident booklet instructions for Form 40NR, line 3. |
| Residents with a pension earned elsewhere | Alabama residents are taxed on their entire income wherever earned. The Form 40 booklet lists income a resident does not report, including United States retirement system benefits, Alabama Teachers’, Employees’ and Judicial retirement benefits, military retirement pay, and payments from a defined benefit plan under IRC 414(j). Other pensions and annuities are reported on Schedule RS. The source says: “tax on their entire income whether earned within or without Alabama”. This rests on the resident Form 40 booklet. The 2025 Schedule RS adds a retirement exclusion for a taxpayer 65 or older who receives taxable retirement income: “each taxpayer is eligible up to $6,000 not to exceed the Retirement Income Taxable to Alabama”. |
| Part-year residents (year of a move) | A part-year resident reports only income earned while a resident of Alabama on Form 40, with itemized deductions and the federal tax deduction prorated to the period of residence. A part-year resident who also had Alabama source income as a nonresident files both Form 40 and Form 40NR. The source says: “should only report income earned while a resident of Alabama”. This rests on the resident and part-year Form 40 booklet. |
| Rate | Alabama’s Department of Revenue rate page, which is undated, prints a graduated schedule for single filers of 2% on the first $500 of taxable income, 4% on the next $2,500 and 5% on all taxable income over $3,000, with wider brackets for a joint return. The 2025 booklets themselves compute the tax from printed tax tables. The source says: “5% All taxable income over $3,000”. |
| Return to file | Residents file Form 40, or the short Form 40A if eligible. Nonresidents file Form 40NR, and a part-year resident with Alabama source income as a nonresident files both Form 40 and Form 40NR. The source says: “You MUST Use Both Form 40 and Form 40NR If”. |
A $40,000 move-year example
A retiree receives $40,000 of pension in the year of a move: $20,000 before the move date, as an Alabama resident, and $20,000 after leaving.
The first $20,000 can be taxed by Alabama; the rest is outside its reach under the federal rule below. Taxed wholly at the lowest printed rate, 2%, the tax on it is computed as $20,000 x 0.02 = $400; taxed wholly at the highest, 5%, it is computed as $20,000 x 0.05 = $1,000. The real figure falls between these bounds before any exclusion or credit. Federal tax still applies.
The federal rule that protects a nonresident
4 U.S.C. 114(a) bars a state income tax on retirement income of an individual “who is not a resident or domiciliary of such State”. Retirement income means any income from a qualified retirement plan, a simplified employee pension, a 403(a) or 403(b) plan, an individual retirement plan, an eligible 457 plan or a governmental plan. Income from a nonqualified deferred compensation plan counts only if it is part of a “series of substantially equal periodic payments” made for life or for a period of at least 10 years, or is a payment after termination of employment from a plan that exists only to provide benefits above the Internal Revenue Code limits, so not every payment is covered. Retired pay of a member of a uniform service is also covered.
Related: how Alabama taxes retirement income, whether Alabama taxes pensions, out-of-state pension tax by state, and deferred compensation lump sums after a move.
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Answer againSources
- 2025 Form 40 Booklet, Residents and Part-Year Residents (Alabama Department of Revenue): https://www.revenue.alabama.gov/wp-content/uploads/2026/01/25f40bk.pdf
- 2025 Form 40NR Booklet, Nonresidents (Alabama Department of Revenue): https://www.revenue.alabama.gov/wp-content/uploads/2026/01/25f40nrbk.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/
- 2025 Schedule RS, Retirement Income (Alabama Department of Revenue): https://www.revenue.alabama.gov/wp-content/uploads/2026/01/25schrsblk.pdf
- 4 U.S.C. 114, Limitation on State income taxation of certain pension income (U.S. Government Publishing Office, 2023 edition): https://www.govinfo.gov/content/pkg/USCODE-2023-title4/html/USCODE-2023-title4-chap4-sec114.htm
Sources: the primary documents linked above, read on October 7, 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.