Who Needs to File Alabama Form 40NR and How to Complete It

Filing taxes as a nonresident of Alabama can be confusing, especially when determining which forms to use. Alabama Form 40NR is designed for those who earn income in the state but do not qualify as full-year residents. Understanding who must file and how to complete the form correctly is essential to avoid errors or penalties.

This guide explains who must file Form 40NR, what income is taxable, the steps to complete the form, available deductions and credits, and the consequences of failing to comply.

Who Must File

Alabama Form 40NR applies to individuals who earn income in the state without meeting full-year residency requirements. Residency is determined by domicile, time spent in Alabama, and intent to remain. Nonresidents usually include those living in another state but working in Alabama or receiving income from Alabama-based sources such as rental properties, businesses, or investments.

Employment income is a primary reason for filing. Wages, salaries, or commissions from an Alabama employer are taxable, regardless of residency. This also applies to remote workers if their employer is based in Alabama and withholds state taxes. Self-employed individuals conducting business in Alabama, even temporarily, may also need to file.

Other taxable income includes rental earnings from Alabama properties, capital gains from selling real estate in the state, and income from partnerships or S corporations operating in Alabama. Lottery or gambling winnings from Alabama-based casinos or events may also require filing Form 40NR.

Taxable Income

Nonresidents must report all income derived from Alabama sources. This includes wages, freelance work, and consulting fees for services performed in the state. Even if a contract is signed elsewhere, earnings must be reported if the work was completed in Alabama.

Investment income tied to Alabama is also taxable. Interest from Alabama-based financial institutions and dividends from companies operating in the state may require reporting. Capital gains from selling Alabama real estate are taxed at 5%. Additionally, Alabama law mandates a withholding tax at closing for nonresident property sales—typically 3% of the sales price or the seller’s gain, whichever is higher.

Business income generated in Alabama is taxable, even if the entity is headquartered elsewhere. A nonresident who owns an LLC operating in Alabama must report profits attributable to in-state business activities. Rental income from Alabama properties, including short-term vacation rentals, is also taxable and may be subject to lodging taxes.

Filing Steps

Completing Alabama Form 40NR requires gathering necessary documents, including a federal tax return, W-2s, 1099s, and records of Alabama-earned income. Employers and financial institutions issue tax forms in January, so reviewing them for accuracy helps prevent delays.

The form begins with personal information such as name, Social Security number, and address. Residency details must be correctly stated to confirm nonresident status. Errors in this section can lead to processing issues and incorrect tax assessments. The form also requires listing Alabama-sourced income separately from total earnings to ensure only the appropriate portion is taxed.

Tax liability is calculated using Alabama’s tax brackets, which range from 2% to 5% in 2024. Nonresidents determine their Alabama tax based on the percentage of total income earned in the state. If taxes were withheld from wages, this amount is reported and may reduce the final balance due. Any estimated tax payments made throughout the year should also be included.

Deductions and Credits

Deductions and credits can lower taxable income. The standard deduction for nonresidents is prorated based on the percentage of income earned in Alabama. In 2024, the maximum standard deduction for single filers is $2,500, phasing out as adjusted gross income exceeds $23,000.

Itemized deductions may provide greater tax savings. Alabama allows deductions for state and local taxes paid, mortgage interest, and medical expenses exceeding 7.5% of adjusted gross income. Nonresidents who own Alabama property can deduct real estate taxes, but only the portion applicable to in-state income. Charitable contributions to qualifying organizations are also deductible, with documentation required for amounts over $250.

Tax credits directly reduce liability. Alabama offers a credit for taxes paid to other states, preventing double taxation. Nonresidents with dependents may qualify for the child tax credit, which provides up to $100 per child under 19. Contributions to Alabama’s 529 college savings plan offer another benefit, with deductions up to $5,000 for single filers and $10,000 for joint filers.

Noncompliance Consequences

Failing to file Alabama Form 40NR can result in penalties, interest charges, and legal consequences. The Alabama Department of Revenue (ALDOR) enforces tax compliance using employer-reported W-2s, 1099s, and other financial records to identify individuals who should have filed but did not.

The penalty for failing to file is 10% of the tax due or $50, whichever is greater. If a return is filed but the tax remains unpaid, a separate penalty of 1% per month applies, up to a maximum of 25%. Interest accrues daily on unpaid balances at a rate set annually by ALDOR, which for 2024 is 7%. In cases of willful tax evasion, the state may impose additional fines or criminal charges. To avoid these consequences, nonresidents should file on time and accurately, using extensions if necessary to prevent penalties.