Is Military Retirement Taxable in Alabama?

State tax policies significantly influence the financial landscape for individuals receiving military retirement income. Understanding how a state treats these benefits is an important aspect of retirement planning, as it can affect a retiree’s disposable income and overall financial well-being. Because state tax laws vary, examining the specific regulations of each jurisdiction is necessary. This knowledge helps military retirees make informed decisions about their residency and financial future.

Alabama’s Tax Treatment of Military Retirement

Alabama provides a full exemption for military retirement benefits from state income tax. The exemption applies broadly to all military retirement compensation.

This tax treatment is codified in Alabama law, specifically under Alabama Code Section 40-18-20. Current law provides for a complete exemption of these benefits from state, county, or municipal income tax.

Eligibility for the Exemption

The exemption applies to retirement benefits received from the military services of the United States. This includes retirement pay from all branches of the U.S. Armed Forces, such as the Army, Navy, Air Force, Marine Corps, and Coast Guard. Benefits from the National Guard and Reserves also qualify for this exemption. The exemption extends to survivor benefits derived from military retirement, ensuring that beneficiaries also receive this tax advantage.

Military disability retirement pay received as a pension, annuity, or similar allowance for personal injury or sickness resulting from active service is also not included in taxable income. This includes various forms of disability compensation and pension payments from the Department of Veterans Affairs.

Reporting Exempt Military Retirement Income

Military retirees should manage their exempt income when completing their Alabama state income tax returns. Although military retirement pay is not taxable, it is generally reported on an individual’s federal income tax return. For Alabama state tax purposes, this federally reported income needs to be reconciled.

On Alabama Form 40, the state’s individual income tax return, taxpayers can indicate income that was reported on their federal return but is exempt from Alabama taxation. Specifically, on Form 40, Part IV, Line 5, taxpayers are prompted to disclose if they have income reported federally that is not reported on their Alabama return. Here, the source and amount of the military retirement income should be entered, along with a notation that it is exempt.