Does Alabama Tax Military Retirement Income?

Military retirees often wonder whether their retirement pay is subject to state taxes, as tax policies vary across the U.S. Understanding these rules helps veterans plan their finances and avoid unexpected tax liabilities.

For those retiring in Alabama or considering a move there, it’s important to know how the state treats military pensions for tax purposes.

State Regulations on Military Retirement Income

Alabama does not tax military retirement pay. Section 40-18-20 of the Code of Alabama explicitly exempts military pensions from state income tax. Unlike states that impose partial taxes or income thresholds, Alabama grants a full exemption, meaning retirees do not need to worry about state tax deductions from their pension payments.

This policy makes Alabama an appealing option for military retirees. The state also does not tax Social Security benefits, allowing veterans who rely on both military pensions and Social Security to keep more of their earnings. Additionally, Alabama has relatively low property tax rates, further enhancing its financial appeal.

The exemption applies to all military retirees who establish residency, regardless of where they lived during their service. Some states limit tax benefits to long-term residents or those who retire while already living there, but Alabama grants the exemption without such restrictions.

Determining Tax Exempt Status

Military retirees in Alabama must meet the state’s residency requirements to qualify for the exemption. Alabama considers someone a resident if they maintain a permanent home in the state and spend a significant portion of the year there. Voter registration, a state-issued driver’s license, and property ownership help establish residency.

For retirees who divide their time between multiple states, Alabama follows a domicile standard—meaning the state where an individual has their primary legal residence determines tax obligations. If a retiree owns property in Alabama but spends part of the year elsewhere, they may need to provide documentation such as utility bills, mortgage or lease agreements, and prior state tax filings to confirm Alabama as their primary residence.

While Alabama does not tax military pensions, the Internal Revenue Service (IRS) treats them as taxable income at the federal level. Retirees moving from a state that taxes military pensions may see a lower overall tax burden. If they previously had state income tax withheld from their pension, they should update their withholding elections with the Defense Finance and Accounting Service (DFAS) to prevent unnecessary deductions.

Required Documentation

Military retirees should keep key documents on hand to verify their eligibility for Alabama’s tax exemption. The 1099-R tax form, issued annually by DFAS, details the total amount of military retirement pay received and any federal tax withholdings. Since Alabama does not tax military pensions, retirees should check their 1099-R to ensure no state tax withholding has been applied. If state taxes were withheld in error, they may need to file an amended return to claim a refund.

A DD Form 214 (Certificate of Release or Discharge from Active Duty) serves as proof of military service and retirement status. If the Alabama Department of Revenue (ALDOR) requests verification, retirees should have this document readily available.

Retirees receiving multiple pension payments should ensure they can clearly identify which portion comes from military retirement. Banking records or direct deposit statements can help distinguish military pension income from other sources. The DFAS myPay system provides electronic statements, which can be useful for record-keeping and tax filing.

Filing Steps

Military retirees in Alabama should ensure their state tax filings correctly reflect the exemption on retirement pay. While military pensions are not subject to Alabama income tax, retirees should still review their Form 40 (Alabama Individual Income Tax Return) to confirm that retirement pay is properly excluded from taxable income.

For retirees with additional income from employment, investments, or other taxable sources, it is important to distinguish between taxable and non-taxable earnings. Wages from civilian jobs, rental income, and capital gains remain subject to Alabama’s state income tax and must be reported accordingly. If a retiree receives both military and non-military pension income, reviewing tax documents such as Form 1099-R can help prevent misreporting.

Proper documentation and accurate tax filings ensure that military retirees fully benefit from Alabama’s tax exemption on military pensions while complying with state tax laws.